Martin John Green in his capacity as liquidator of Arimco Mining Pty Limited (in liquidation) v CGU Insurance Limited - [2008] NSWSC 825

No judgment structure available for this case.

Reported Decision:
66 ACSR 398

New South Wales

Supreme Court

CITATION: Martin John Green in his capacity as liquidator of Arimco Mining Pty Limited (in liquidation) v CGU Insurance Limited & Ors [2008] NSWSC 825

HEARING DATE(S): 14/07/08-18/70/08, 21/07/08-24/07/08, 28/07/08, 4/08/08-5/08/08

JUDGMENT DATE :
18 August 2008

JURISDICTION: Equity Division
Commercial List

JUDGMENT OF: Einstein J

DECISION: Parties to bring in short minutes of order.

CATCHWORDS: Insurance - Insurance Contracts Act - Directors and Officers liability - Insolvent trading claim under section 588 M Corporations Law brought by the plaintiff in his capacity as liquidator - Section 6 (4) Law Reform Miscellaneous Provisions) Act - Non-disclosure /misrepresentation - Relevant test that of the reasonable insured not the prudent insurer - Knowledge requires considerably more than “suspicion” or “belief” - Matter must be known to insured at the time to be a matter relevant and known to insured or a reasonable person to be relevant to the decision of insurer whether to accept the risk and if so on what terms - Legislative history of sections 21 and 28 of Insurance Contracts Act - Dangers posed by litigation proceeding through benefit of hindsight - Finding that had proper disclosure been made insurer would not have issued a policy without an insolvency exclusion - Terms of settlement reached by liquidator with directors of directors agreed to entry of judgment against each of them in the amount of $15,000,000, liquidator agreeing to receive far smaller amounts from directors presently - Terms of settlement include agreement by liquidator to discharge judgment if either the (1) proceedings terminate in favour of the liquidator or (2) liquidator reaches a compromise of the proceedings against insurer or (3) proceedings terminate in favour of the insurer - Finding that liquidator contracted for the entry of judgment but relevantly agreed not to enforce the judgment and agreed to discharge it in any event - Liquidator alleged to have approbated and reprobated - Section 588G (2) (b) of Corporations Law - Reasonable grounds for suspicion of insolvency - Belief in insolvency on the grounds of balance of probabilities not the test

LEGISLATION CITED: Company Law Review Act 1998 (Cth)
Corporations Act 2001 (Cth)
Insurance Contracts Act 1984 (Cth)
Law Reform (Miscellaneous Provisions) Act 1946 (NSW)

CATEGORY: Principal judgment

CASES CITED: Almario v Allianz Australia Workers Compensation (NSW) Insurance Ltd (2005) 62 NSWLR 148
Australian Securities and Investments Commission v Plymin and Others (2003) 46 ACSR 126
Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989) 97 FLR 284; (1989) 5 ANZ Ins Cases 60-933
Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399
Barclay Holdings (Australia) Pty Ltd v British National Insurance Co Ltd and Another (1987) 8 NSWLR 514
Blair & Perpetual Trustees Co Ltd v Curran (Adams’ Will) (1939) 62 CLR 464
CGU Insurance Limited v Porthouse [2008] HCA 30
Chamberlain v Deputy Commissioner of Taxation (ACT) (1988) 164 CLR 502
Commercial Union Assurance Co of Australia Ltd v Beard (1999) 47 NSWLR 735
Commonwealth Bank of Australia v Friedrich (Friedrich/National Safety Council case) (1991) 5 ACSR 115
GIO General Ltd v Wallace (2001) 11 ANZ Ins Cas 61-506
Guthrie House Ltd v Cornhill Insurance Co Ltd (1982) 2 ANZ Ins Cas 60-466
Kinzett v McCourt (1999) 46 NSWLR 32
Macquarie Bank Ltd v National Mutual Life Association of Australia Ltd and Others (1996) 40 NSWLR 543
Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228
Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd& Anor (1998) 153 ALR 529
Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd & Anor [2001] 50 NSWLR 679
Permanent Trustee Australia Limited v FAI General Insurance Company Limited (in liquidation) (2003) 214 CLR 514
Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589
Ratcliffe v VS & B Border Homes Ltd (1987) 9 NSWLR 390
Tate & Sons v Hyslop (1885) 15 QBD 368
Toikan International Insurance Broking Pty Ltd v Plasteel Windows Australia Pty Limited (1989) 15 NSWLR 641
Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd [1990] VR 919
VACC Insurance Co Ltd v BP Australia Ltd (1999) 47 NSWLR 716

TEXTS CITED: Ford, Principles of Corporations Law, 13th ed (2007)

PARTIES: Martin John Green in his capacity as liquidator of Arimco Mining Pty Limited (in liquidation) (Plaintiff)
CGU Insurance Limited (First Defendant)

FILE NUMBER(S): SC 50177/04

COUNSEL: Mr D Davies SC, Mr MS White (Plaintiff)
Mr R Macfarlan QC, Ms C Needham SC, Mr S Goodman (First Defendant)

SOLICITORS: Henry Davis York (Plaintiff)
Kennedys (First Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

Einstein J

Monday 18 August 2008

50177/04 Martin John Green in his capacity as liquidator of Armico Mining Pty Limited v CGU Insurance Limited & Ors

JUDGMENT

The proceedings

1 These proceedings concern a claim against CGU Insurance Limited Insurance as the Directors and Officers insurer of Arimco Mining Pty Limited (in liquidation) (Arimco) and its directors and officers. CGU issued a Directors and Officers Policy [No. 02DO 0265146] to Arimco and its directors, such Policy incepting on 31 December 1998 and continuing up to 31 December 1999. The policy also provided D&O Insurance to the directors and officers of the ARL Group.

2 The ARL group, through Arimco, mined gold and copper, at its Mt McClure, Mt Selwyn and Gidgee mines.

3 The proceedings are brought by virtue of leave having been obtained under section 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946. The plaintiff is Mr Martin John Green in his capacity as liquidator of Arimco who seeks an order, pursuant to section 588M of the Corporations Act, that the directors pay to the liquidator an amount alleged to be equal to the loss or damage suffered by creditors in relation to debts incurred by Arimco at a time when he alleges that it was insolvent.

4 As originally constituted, the proceedings were brought also against the relevant directors and officers (being Roy Swan, John Roberts, Colin Smith and Donna Stubbs), and against the administrator of the estate of the late Philip Pearce (his wife Carol Pearce) and against CGU Insurance in relation to Mr Pearce by virtue of section 51 Insurance Contracts Act.

5 A settlement was effected between the plaintiff and the parties other than CGU on 7 July 2006 whereby the directors (who are taken to include Ms Stubbs) and Mrs Pearce as executor agreed to a judgment being entered against each of them for $15 million but with certain terms concerning payments to satisfy those judgments. Although CGU was a party to the mediation which resulted in that settlement, CGU declined to participate in the settlement.

6 The claim is an insolvent trading claim under section 588M of the Corporations Act. The allegation is that Arimco was insolvent from 1 February 1999.

7 On 14 March 1999 Mr Green was appointed Voluntary Administrator of Arimco and, on 7 May 1999, the creditors of Arimco voted to wind up the company and appointed him as liquidator. On 15 November 2004, the court ordered that Arimco be wound up and that Mr Green be appointed liquidator.

8 The claim is in respect of debts said to total $21,217,765.47 and to have been incurred between 1 February and 14 March 1999.

The essential issues

9 CGU relies upon the following defences:

i. First, CGU claims that by operation of a Terms of Settlement entered into on or around 5 July 2006 (the Terms) agreed between the liquidator and the directors, CGU’s liability is capped at the amount which the directors are liable to pay, namely $320,000. Alternatively CGU claims that its liability is capped at $15,000,000 (see Amended Defence to Second Further Amended Summons (Defence), par. 20);

The defendant contends that the directors failed to disclose a range of matters including the following:

(i) Changes to the financial position of ARL in November and December 1998.

(ii) Changes which occurred at the mines in the second half of 1998.

(iii) The fact that Rothschild, the financier of the ARL Group, had investigated the financial position of the mines and expressed concerns about their value.

(iv) The fact that Rothschild was intending to undertake a review of the business, and that, if that review was unfavourable, ARL would be required to make payments in 1999 and 2000 which it would be unlikely to be able to meet.

(v) The fact that ARL had been notified that Leighton Contractors Pty Ltd (“Leighton”) intended to commence legal proceedings for $15,000,000.

iii. Thirdly, CGU claims that the liquidator has not proven that debts were incurred in the amount pleaded, or that the creditors’ loss and damage is represented by the amounts of the debts;

[CGUs proposition is that the two must go hand in hand because it contends that there were no events intervening between the end of December 1998 and the beginning of February 1999 of such a drastic character to cause a buoyant company to suddenly become insolvent]

10 The pleaded issues also embrace the following questions:

i. whether CGU would have entered into the contract of insurance for the same premium and on the same terms and conditions in any event;

ii. if CGU makes out its defence based on sections 21 and 28 ICA, to what is it entitled to reduce its liability under section 28(3);

Questions of admissibility

11 During the hearing a question arose as to the admissibility for particular purposes, of materials which only became known after December 1998. Counsel agreed that the ultimate decision as to the admissibility of these materials would be handed down in the final judgment upon the basis that during final address submissions would be taken on the admissibility issues. The ruling became known as 'the three pronged ruling’ to cover the questions to be reserved into the final judgment concerning the admissibility of materials:

i. going to the directors knowledge of facts;

ii. going to the directors knowledge of the relevance of the facts, [assuming the directors were found to have known them];

12 In the events which happened [notwithstanding the court during final address having reminded the counsel of their entitlement to address on the evidence which they wished to contend was or was not admissible] very little instant specific attention was given by either party seeking in final address to contend that particular evidence was or was not to be required to be rejected as inadmissible in terms of the non-disclosure and misrepresentation cases. Mr Macfarlan submitted that there was no profit to be had in trawling through the evidence and examining its admissibility. His proposition was that the Court should approach the matter by identifying what evidence the Court found as compelling in the case and when and if that evidence had a cloud over it in terms of relevance and admissibility, the court would have to deal with the matter in the reasons. Mr Davies agreed with that approach, making the point that the written submissions of the liquidator had sought to identify where post 1998 material had been taken into account in coming to a view about a particular factor or group of factors.

13 In those circumstances the Court has approached the questions of admissibility in the fashion suggested by both senior counsel. Hence it is unnecessary for the court to assay the task of laying down blanket rulings. In truth the question becomes one of relevance.

14 Clearly, however, where the question is whether Arimco was insolvent at particular date, the Court may utilise the benefit of hindsight [as for example being given the assistance of expert evidence] to work out just what it is that is shown to have been the position ante.

The dangers posed by litigation proceeding through the prism of hindsight

15 The crucial issue in the proceedings raises questions which are not easy of resolution. In large measure this is because of the enormous difficulties where so much of the evidence is, in one way or another, affected by hindsight. The dangers for the Court in such a circumstance have been alluded to on a number of occasions: as for example in Rosenberg where the Chief Justice put the matter as follows:

In the way in which litigation proceeds the conduct of the parties is seen through the prism of hindsight, because if a foreseeable risk has eventuated and harm has resulted, the particular risk becomes the focus of attention, but at the time of the allegedly tortious conduct there may have been no reason to single it out from a number of adverse contingencies or to attach to it the significance it later assumed. Recent judgments in this Court have drawn attention to the danger of the failure after the event to take account of the context before or at the time of the event in which a contingency was to be evaluated.

16 The events with which the proceedings are concerned occurred approximately 10 years ago. The evidence called from the underwriters and the evidence called from the directors suffered from the problems of endeavouring to avoid reconstruction with the benefit of hindsight, in a circumstance in which that exercise was mostly impossible. Likewise a huge amount of the evidence called from the respective experts involved their having had access to documents and materials post-dating the end of December 1998 so that even where large sections of the reports were ultimately not read, it could not be said that the hindsight factor had not influenced many of the opinions expressed in these reports. Hence the Court has been astute to monitor the evidence so as, wherever possible, to take account of the context in which particular evidence came forward.

Overview of the types of issue litigated

17 The matters which were litigated involved a close examination of the financial position of Arimco embracing the performance of the mines. Mr Green’s affidavit of 8 March 2007 [on which he was not cross examined] provided a skeletal overview of particular matters. Sections of this affidavit are appropriate to be set out although the whole of the affidavit is before the Court. Some of the matters which are referred to in Mr Green's affidavit are referred to later in the reasons where considerable more detail becomes important.

18 Hence although Mr Green's affidavit was not challenged by CGU, in certain respects the matters which were litigated exposed some additional and some different conclusions to those to which Mr Green had deposed. The findings in relation to these matters are also set out in the reasons which follow.

Summary of Arimco's mining operations

19 The ARL Group, through Arimco, operated the following mines:

i. a gold mine site at Mt McClure in Western Australia;

ii. a gold mine site at Gidgee in Western Australia; and

The ARL Group's banking facilities with Rothschild

20 The ARL Group's primary bankers were Rothschild. Mr Pearce was a director of the holding company of Rothschild [Details of the changing multi-option facility agreement arrangements with Rothschild are set out in the reasons which follow].

Rights Issue

21 On 28 July 1998 the ARL Group lodged with ASIC a prospectus in relation to a rights issue in order to raise funds to expand its exploration drilling programs at Mt McClure and Selwyn, and also to satisfy the requirements of Rothschild to raise equity.

22 The Rights Issue raised approximately $11.226 million in gross proceeds and, on 23 September 1998, ARL allocated under the Rights Issue 56,129,525 ordinary shares.

23 The net cash proceeds from the Rights Issue were approximately $10.2 million [further parameters concerning the Right Issue are also examined in the reasons which follow].

The ARL Group's Annual Report for year ending 30 June 1998

24 The ARL Group published in the same Annual Report the audited accounts of:

i. the listed entity, ARL; and

25 On 3 September 1998 the Audit Committee considered the draft financial statements for the financial year ending 30 June 1998. The Audit Committee resolved to recommend to the board of directors that the financial statements be adopted.

26 On 24 September 1998 the ARL Group's auditors, KPMG, signed the audited financial accounts in the Annual Report for the financial year ending 30 June 1998 (Annual Report). The content of this report is described further below.

27 On the same day, at a meeting of the ARL board of directors, the directors considered the Annual Report and resolved to adopt it.

28 As at the end of September 1998, according to the ARL Group's management accounts for the month of September 1998, the ARL Group had a cash balance of $12.45 million, which funds included the $10.2 million received from the Rights Issue.

29 Arimco, which was not a reporting entity and which was operated by ARL, did not produce its own cashflows. The ARL cashflows, which are reflected in the management accounts are, however, indicative of Arimco's cashflow given that it was Arimco which was the operating entity of the ARL Group.

October and November 1998

30 After the approval of the Annual Report at the meeting of the board of directors on 24 September 1998, the ARL board met on two further occasions in 1998, on 30 October 1998 and 26 November 1998 respectively.

31 At the ARL board meeting on 30 October 1998, the directors had available to them the financial and operational performance of the ARL Group for the month of September 1998, in particular the September 1998 Financial Overview.

32 At the ARL board meeting on 26 November 1998 the directors had available to them the financial and operational performance for the month of October 1998, in particular, the October 1998 Financial Overview.

33 According to the minutes of the ARL board meeting held on 26 November 1998:

34 Following the ARL board meeting on 26 November 1998, at which the financial results for October 1998 were discussed, the ARL board of directors did not meet again until 3 February 1999.

35 Based on Mr Green’s review of the documents of the ARL Group, in addition to the October 1998 Internal Monthly Report that was made available to the directors at the board meeting on 26 November 1998 and the weekly production results that were made available to Mr Swan, the following documents in relation to production were made available to Messrs Pearce, Swan, Roberts and Smith in November 1998:

i. on 13 November 1998, they were provided with the summary management reports for the weeks of 27 October 1998 and 3 November 1998, and minutes of a meeting to discuss administration and contracts which was conducted on 9 November 1998;

ii. on 20 November 1998, they were provided with the summary management report for the week of 10 November 1998;

36 As regards the cash balance of the ARL Group:

i. as at October 1998, according to the October 1998 monthly management accounts, the ARL Group had a cash balance of $10.08 million;

December 1998

37 There was no ARL board meeting in December 1998. There were no ARL board meetings in the period 26 November 1998 to 3 February 1999.

38 Further, the chairman, Mr Pearce, was absent from the ARL Group during the period 16 December 1998 to 18 January 1999 following surgery.

39 Based on Mr Green’s review of the documents of the ARL Group, in addition to the weekly production results which were available to Mr Swan, the following documents in relation to production were made available to Messrs Pearce, Swan, Roberts and Smith in December 1998:

i. on 4 December 1998, they were provided with the summary management report for the period 1 to 24 November 1998;

ii. on 14 December 1998, they were provided with the minutes of a meeting held on 7 December 1998 which recorded that Mr Swan, Mr Ryan, Ms Stubbs, Mr Goldner and Mr Ingham met and discussed the results for just the one day of 1 December 1998;

iii. according to an undated memorandum from Ms Stubbs to the directors, on 11 December 1998 Mr Swan, Mr Ryan, Ms Stubbs, Mr Goldner and Mr Ingham met and discussed the results for the period 1 December 1998 to 8 December 1998;

40 On a date between 11 and 15 December 1998, the ARL Group completed and submitted to Jardine Australia Insurance Brokers Pty Limited (Jardine), a proposal for directors and officers professional liability insurance. Subsequently, on 29 December 1998, Jardine informed the ARL Group that the directors and officers would commence a new period of directors and officers' professional liability insurance with the first defendant, CGU Insurance Limited (CGU) (“the Policy”). The term of the Policy, which was formally issued by CGU on 19 April 1999, was from 31 December 1998 to 31 December 1999.

41 On 21 December 1998, there was a meeting of the Audit Committee.

42 On 24 December 1998, ARL received a letter from Rothschild which indicated that it intended to review the ARL Group's banking facilities, including giving consideration to an extension of the amortisation and expiry dates of the Arimco facility and the Mt McClure acquisition facility.

43 In December 1998, Rothschild negotiated the purchase by Geographe Resources Limited (Geographe) of the Convertible Note. On 29 December 1998, Rothschild transferred to Geographe the 20,000,000 ARL convertible notes for consideration of $4.7 million and the notes were immediately converted to equity.

44 Following the transfer of the Convertible Note and its conversion, the ARL Group's exposure to Rothschild had reduced to $8.7 million, comprising:

i. the Mt McClure facility of $5.2 million, the repayment date for which was 31 July 1999; and

45 As at 31 December 1998, according to the December 1998 management accounts which were finalised in late January 1999, the ARL Group had a cash balance of $11.02 million.

January 1999

46 The ARL board of directors did not meet in January 1999.

47 Mr Green's affidavit had also dealt with the January 1999 profit and loss position treating also with the then budget position and also with falling copper price. That section of the affidavit is reproduced below but I note that the matters litigated travelled into this period of time in greater detail so that later in the judgment the courts findings as to the precise position are to be found. In any event Mr Green had deposed as follows:

i. During January 1999, the ARL Group suffered significant operating losses which exceeded any losses made by the ARL Group in the preceding six months and which resulted in the dissipation of the cash available to the ARL Group to pay Arimco's creditors.

ii. In particular, Arimco sustained in January 1999 a significant operating loss (before abnormal items and income tax) of $5.4 million. According to the management accounts for the period July 1998 to January 1999 (see MJG2 tabs 3 to 9), Arimco made losses in August ($1.2 million), September ($1.0 million) and November 1998 ($1.42 million). Arimco had, however, made profits in July ($1.2 million), October ($684,000) and December 1998 ($364,000). In the circumstances, the loss Arimco made in January 1999 of $5.4 million was a significant departure from the profits and losses that Arimco had sustained over the previous six months, being almost four times larger than the November 1998 loss which until then had been the largest loss for the 1998 to 1999 financial year.

iii. Gidgee’s gold production in January 1999 was 27% below budget.

iv. Mt McClure's gold production in January 1999 was 37% below budget.

a) the weekly production results for 1 to 19 January 1998 that were available to Mr Swan;

b) the summary weekly management reports for:

c) 1 to 5 January 1999, which was circulated to the directors by Ms Stubbs on 13 January 1999 and which showed, inter alia, that gold production was down 28% and 44% at Gidgee and Mt McClure respectively, and copper production was down 19% at Selwyn. [See the memorandum dated 13 January 1999 from Ms Stubbs to the directors];

d) 1 to 12 January 1999, which was circulated to the directors by Ms Stubbs on 20 January 1999 and which showed, inter alia, that gold production was down 22% and 38% at Gidgee and Mt McClure respectively, 21% at Selwyn, and copper production was down 31% at Selwyn. [See the memorandum dated 20 January 1999 from Ms Stubbs to the directors];

e) 1 to 19 January 1999, which was circulated to the directors by Ms Stubbs on 28 January 1999 and which showed, inter alia, that gold production was down 16% and 44% at Gidgee and Mt McClure respectively, and copper production was down 15% at Selwyn. [See the memorandum dated 28 January 1999 from Ms Stubbs to the directors] and

f) 1 to 26 January 1999, which was circulated to the directors by Ms Stubbs on 5 February 1999 and which showed, inter alia, that gold production was down 22% and 41% at Gidgee and Mt McClure respectively. [See the memorandum dated 5 February 1999 from Ms Stubbs to the directors];

vi. The falling copper price impacted on Arimco's revenue from copper concentrate, the sale of which was regulated by an agreement with Glencore International AG (Glencore) by which Arimco was entitled to invoice Glencore for an advance payment of up to 90% of the estimated value of copper concentrate prior to shipment, with the balance being invoiced, subject to adjustments, upon the arrival of the shipment some months later. As a result, when the copper price fell significantly in January 1999, when adjustments were made following the arrival of shipments of copper concentrate some months after the original estimation of its value, the adjustment was such that the actual value of the shipment was less than the estimated value. Accordingly, Arimco owed Glencore in relation to the adjustments. This reduced the cash inflow for Arimco.

a) the ARL Group incurred its most significant cash outflow for the 1998 to 1999 financial year of $6.9 million, leaving it with just $4.10 million in cash available.

b) on 4 January 1999, the sum of $2,355,037.37, which funds formed part of the proceeds of the Rights Issue, were withdrawn from their deposit with Colonial State Bank. These funds were never returned to deposit and were applied to pay Arimco's creditors. The application of these funds towards the payment of creditors, and the failure to re-deposit them, indicates that Arimco was not earning sufficient revenue from its operations to pay its creditors from January 1999.

a) on 4 January 1999, Ms Stubbs circulated to "the board of directors", a memorandum in which she stated:

Given that there was no board meeting in December 1998, I have attached the reports that would have been tabled at such a meeting in order to keep you informed. The reports attached are as follows:

· operations report - November 1998;

· secretarial report;

· treasury report;

b) letter dated 6 January 1999 from Rothschild to Ms Stubbs at MJG1 tab 11 pages 379 to 380);

c) memorandum dated 14 January 1999 from Mr Ryan to Mr Pearce at MJG1 tab 11 pages 381 to 385; and

1 February 1999

48 By 1 February 1999, all of the proceeds of the Rights Issue, save for the $5.2 million on deposit with Rothschild, had been withdrawn from deposit as follows:

i. on 4 January 1999, the sum of $2,355,037.37; and

49 From 1 February 1999 up to Mr Green’s appointment as administrator on 14 March 1999, Arimco continued to trade.

ARL board meeting on 3 and 4 February 1999

50 The ARL board of directors met at the Selwyn mine in Queensland on 3 and 4 February 1999. Present at the meeting were Mr Pearce, Mr Swan, Mr Roberts, Mr Smith, Ms Stubbs and Mr Ryan.

51 The board papers that were available to the directors for the purpose of that meeting included:

a) November 1998 (pages 220 to 227); and

ii. the Internal Monthly Report for December 1998 (pages 71 to 94); and

52 According to the minutes, Ms Stubbs tabled the Financial Overview for December 1998 "and provided a summary of significant matters, including the cash position of the group". According to the Financial Overview for December 1998, which report was dated 2 February 1999, the ARL Group was having significant cash flow difficulties and, in January 1999, the proceeds of the rights issue had been "borrowed" to pay creditors. The Financial Overview for December 1998 stated;

The seemingly healthier cash balance was short lived since the majority of creditor payments were made in January and the January gold shipments dropped off. Other than the $5.2m invested with Rothschild, the remainder of the share rights funds were temporarily "borrowed" to meet the major payments at the end of January.

53 The managing director's report for December 1998, a copy of which was tabled at the board meeting, provided a summary of operations for December 1998 and a forecast for January 1999. The report:

i. identified decreased production caused by low grade ore and mill shutdowns in December 1998; and

5 February to 1 March 1999

54 From early to mid February 1999, Mr Pearce, Mr Swan, Mr Roberts and Mr Smith were provided with the production results for late January 1999 and February 1999 as follows:

i. on 5 February 1999, they were provided with the results for the period 1 to 26 January 1999 which showed, inter alia, that gold production was down 22% and 44% at Gidgee and Mt McClure respectively, and copper production was down 15% at Selwyn;

ii. on 10 February 1999, they were provided with the results for the period 1 and 2 February 1999 which showed, inter alia, that gold production was down 22% at Selwyn and copper production was down 16% at Selwyn;

iii. on 18 February 1999, they were provided with the results for the period 1 to 9 February 1999 which showed, inter alia, that gold production was down 24% at both Gidgee and Mt McClure, down 12% at Selwyn, and copper production was down 16% at Selwyn;

iv. at a meeting on 19 February 1999, Mr Swan, Ms Stubbs , Mr Goldner and Mr Ingham met to discuss the results for the period 1 February 1999 to 16 February 1999. The minutes of that meeting showed that gold production was down 25% at Gidgee, 16% at Mt McClure and 17% at Selwyn, and copper production was down 7% at Selwyn;

55 In the period 15 to 19 February 1999, Mr Swan sold on the ASX 300,000 of his 350,923 shares in ARL.

56 On 12 February 1999, Mr Goldner wrote to Mr Ryan regarding the Gidgee mine in relation to which he considered that, without further exploration, the mine would no longer be profitable, particularly as a result of high costs and the limited cash flow it was generating.

57 On Friday, 19 February 1999:

i. according to the minutes of the management committee meeting held on 19 February 1999 at which Mr Swan, Ms Stubbs, Mr Goldner and Mr Ingham were present, in addition to the discussion in relation to production referred to above, it was agreed that a presentation would be made to the ARL board of directors at the next board meeting which was scheduled for 2 March 1999;

ii. Mr Ryan spent his last day at the ARL Group's head office. The following Tuesday, 23 February 1999, Mr Roberts confirmed to various managers that Mr Ryan would not be returning.

alternatives for reductions in exploration expenditure at Selwyn

58 On 25 February 1999:

i. Ms Stubbs, Mr Goldner and Mr Ingham attended a meeting where the financial position of the ARL Group was discussed and it was decided that Ms Stubbs, Mr Goldner and Mr Ingham would make a presentation to the board of directors on 2 March 1999 regarding the situation;

59 On 26 February 1999:

i. the management committee met. Present were Mr Swan, Ms Stubbs, Mr Goldner and Mr Ingham. In addition to the discussion of production for the period 1 February 1999 to 23 February 1999 referred to above, the minutes confirmed the statement that had been made in the minutes of the management committee meeting that was held on 19 February 1999 that a presentation on the cash flow position would be made at the next meeting of the board of directors which was scheduled for 2 March 1999;

60 By 28 February 1999:

i. the ARL Group had $6.97 million in cash available, of which $5.2 million comprised the deposit held at Rothschild;

ARL board meeting on 2 March 1999

61 The ARL board of directors met on 2 March 1999. Present at the meeting were Mr Pearce, Mr Swan, Mr Smith, Mr Roberts and Ms Stubbs.

62 The minutes of the 2 March 1999 ARL board meeting record:

b) the cash allocated for creditors for the preceding week was $4.1 million against $10.8 million;

c) there was a concern that creditors may stop supply, thereby leading to the shutting down of ARL's operations;

d) there were total creditors and liabilities of $38 million;

e) Arimco's position would " raise alarm bells " with its secured creditor, Rothschild; and

63 The minutes recorded:

64 In relation to cash flow, the minutes recorded that:

65 The board of directors agreed to take the following steps:

a) to send Mr Smith to the Gidgee mine site the following day to review operations;

b) management to access the $5.2 million held with Rothschild, albeit it was acknowledged that even if the $5.2 million was made available to the ARL Group, it would not alleviate the cash flow problems later that month;

66 According to the agenda to the 2 March 1999 board meeting, the Financial Overview for January 1999 was not available, but was to be made available on Friday of that week (5 March 1999).

67 On 2 March 1999 the audit committee also met. In attendance were Mr Roberts, Mr Smith, Mr Pearce and Ms Stubbs of the ARL Group. Also in attendance were Mr John Gulson and Mr P Zammitt of the ARL Group's auditors, KPMG, and Mr S Lemonis of the ARL Group's solicitors, Watson Mangioni.

3 March 1999 to Mr Green’s appointment on 14 March 1999

68 Throughout early March 1999 up to Mr Green’s appointment on 14 March 1999, Arimco continued to withhold payment of creditors.

69 On 3 March 1999:

i. Ms Stubbs contacted Rothschild to arrange a meeting. A meeting was scheduled for 10 March 1999;

70 On 5 March 1999;

“I point out in further support of the above that Rothschild can call an event of default if in the opinion of Rothschild there is any adverse change in the financial condition or operations of the Company. An event of default allows them to demand immediate repayment of facilities”;

ii. the ARL Group released to the ASX its half yearly figures for the six months from 1 July 1998 to 31 December 1998;

71 On 6 March 1999:

i. Ms Young, forwarded a memorandum to Ms Stubbs, copied to, inter alia, Mr Swan, headed " Week's cash distribution ";

72 On 7 March 1999, Mr Swan conveyed to Mr Smith the contents of the memorandum he received from Messrs Goldner and Ingham on 6 March 1999 (having noted that Mr Roberts had also received a copy of the memorandum).

73 On 10 March 1999, Mr Roberts, Mr Swan, Ms Stubbs, Mr Ingham and Mr Goldner met with representatives of Rothschild to discuss the ARL Group's financial position, including the status of the payment of creditors.

74 On 12 March 1999:

a) Rothschild expressed their concern at the information received by Rothschild at the 10 March 1999 meeting regarding the "serious financial position" of the ARL Group;

b) Rothschild had brought Mr Love to the meeting in order to protect Rothschild's exposure;

…it was obvious from the figures that ARL was unable to pay its creditors and the situation was getting worse because of operational problems at Gidgee and Mt McClure and a delayed shipment of copper concentrates from Townsville. This meant that our revenue from production recently was poor, but that it would improve in the near future. The immediate problem was to be able to satisfy the creditors, particularly those whose payments had extended out to 60 days and beyond.

…it would be very helpful if RAL [Rothschild] released all or some of the $5.2 million which was in fact ARL's money, but was "locked up" by RAL in accordance with the agreement following the rights issue in October 1998.

75 On 14 March 1999, and prior to any further meeting with Rothschild, a meeting of the ARL board of directors was held at the Sydney head office. Only Mr Roberts and Mr Swan were present. The minutes of the board meeting record that the resolutions that were passed at the meeting included the following:

i. " That John Barry Roberts be elected to act as Chairperson of the meeting " (the meeting having been advised of the resignation of Mr Pearce as a director);

ii. " That in the opinion of the directors, the Company is insolvent or is likely to become insolvent within the foreseeable future ";

iii. "That the Company's affairs be put under control of an Administrator pursuant to Part 5.3A of the Corporations Law ; and

That Martin John Green be appointed Administrator of the Company

76 On the same day, there was a meeting of the board of directors of Arimco, although again, only Mr Roberts and Mr Swan were present. The minutes of the board meeting record that the resolutions that were passed at the meeting included the following:

i. " That John Barry Roberts be elected to act as Chairperson of the meeting " (the meeting having been advised of the resignation of Mr Pearce as a director);

ii. " That in the opinion of the directors, the Company is insolvent or is likely to become insolvent within the foreseeable future ";

iii. "That the Company's affairs be put under control of an Administrator pursuant to Part 5.3A of the Corporations Law" ; and

That Martin John Green be appointed Administrator of the Company

Appointment of receivers

77 The following day, on 15 March 1999, Rothschild appointed Andrew Love, Peter Geroff and John Trevor of Ferrier Hodgson as receivers and managers of Arimco. The receivers managed the charged assets of the company, and maintained possession of most of the ARL Group's books and records, up until their retirement on 19 December 2000.

78 On 6 February 2001 CGU informed the directors of ARL and Arimco that "CGU denies liability to provide any indemnity in respect of any such claim" under the D&O Policy by letters each dated 6 February 2001 to each of the directors.

79 On 7 July 2006, the proceedings pursued by Mr Green against the second to sixth defendants were settled for the sum of $15 million [the effect of the terms of settlement are dealt with in the reasons].

80 Mr Green has not paid any dividends to the creditors of Arimco.

The witnesses

81 A brief overview of witnesses called by the parties is appropriate. The approach taken is to introduce the witnesses in the order in which they were called and in some cases to note the executive summaries informing the extensive analyses provided in the voluminous reports [backed by extensive documentation]. Where appropriate some observations are made in the reasons concerning the reliability of particular witnesses. The Court does take into account the fact that where particular witnesses [whether as experts retained by a party or being persons such as the underwriters who were cross-examined], were instructed to make extensive assumptions as to particular matters, they would likely have been heavily influenced by the character of those assumptions in the giving of their opinions, even where large segments of their affidavits or reports were not read. As previously observed, the findings are based on the whole of the evidence and a commonsense approach to the acceptance or rejection of particular evidence is taken by the Court in terms of its evidentiary weight.

The plaintiff's case in chief

82 The plaintiff in aid of its case in chief called:

· Arimco was balance sheet insolvent;

· Current liabilities exceeded current assets even allowing for potential cash advances of funds held by ARL;

· Arimco had incurred a substantial loss in January 1999 [taking into account as facts assumed by the witness that this loss resulted from the effect of significant production problems at the mines caused by inclement weather and maintenance issues];

· Cash flow from operations turned negative, reflecting the poor trading month and pressure from creditors. Also in January 1999 Arimco was withholding payments due to creditors. While in November and December Arimco temporarily utilised funds raised by the rights issue, these funds were repaid. In January 1999 further rights issue funds were utilised again and they were unable to be repaid;

· Arimco had no ability to raise funds in the short term either from its existing facilities or other sources.

The defendant's case

83 The defendants called:

i. Mr Dorfan, currently director, ‘Corporate Finance-Valuations', of Deloitte Touche Tohmatsu. His experience had principally been gained in the areas of forensic accounting and in valuations. He had undertaken numerous assignments where he had been required to analyse accounting records and establish trends for the purpose of preparing and assessing insurance claims and quantifying damages and loss of profits claims in commercial litigation matters, including breach of contract, patent infringement, passing off of goods and defamation cases. He had been instructed to answer a number of questions under particular headings as follows:

· Establish the financial position, capital structure and operations of the ARL Group as disclosed in the Annual Report as at 30 June 1998, which is dated 24 September 1998, and compare that to the financial position, capital structure and operations of the ARL Group as at:

(a) 26 November 1998, during the date of the last minuted directors meeting of Arimco and

(b) 31 December 1998, being the inception date of the Directors and Officer's Insurance Policy issued by CGU.

· Whether there was subsequent information of a material nature (and the nature of that information) not disclosed in the Annual Report "that could affect the financial position, capital structure or operations" of ARL and Arimco as at 26 November 1998 or 31 December 1998;

· Were the directors aware of that information in that it was contained in, or apparent from, facts or documents made available to:

Executive Director level

· If the directors were not aware of the information, was the information such that they should have been aware of it.

3.2 The Annual Report setting out the financial position at 30 June 1998 accompanied the Proposal.

3.3 As at 26 November 1998, the Group had no reliable forecasts. It had made a loss of $707,000 between 1 July 1998 and 31 October 1998 against a budgeted profit of $551,000. The copper price had fallen to 12 year lows and the Group’s copper hedging contracts had become inoperative. Excluding the proceeds from a rights issue totalling $11.226 million received on 23 September 1998 (Rights Issue Proceeds), the Group’s cash resources had reduced by $3.034 million and the Group’s net current assets had fallen to a negative $2.169 million, whereas they were positive at 30 June 1998. There was the potential for the Group to breach certain of its covenants with its financiers, Rothschild Australia (Rothschild).

3.4 The Group had been given further notice of a claim by Leighton Contractors Pty Ltd (Leighton) of overt $15 million. Leighton had contracted with ARL for a number of years to mine ore and waste at Mt McClure.

3.5 The copper price had fallen further in December 1998. The November financial result (reported in December 1998) was a loss of $1.037 million as against a budgeted profit of $1.014 million. Selwyn was losing about $500,000 a month and the carrying value of the Selwyn mine required reassessment in light of the falling copper price. The liquidity position of the Group deteriorated during December 1998.

(i) An assumed reduction in the gold head grade at the Gidgee mine; and

3.7 Rothschild was in the process of reviewing the Group’s facilities during October, November and December 1998. These facilities included an “overdraft facility” of $3.5 million, the Mt McClure facility of $5.2 million (which was secured by way of a deposit from the Rights Issue Proceeds of an equal amount) and a guarantee facility. Rothschild had also advanced the Group an amount of $4 million by way of convertible notes. The Rothschild Multi-Option Facility Agreement dated 24 April 1998 (MOFA) (refer paragraph 8.31), which governed the aforementioned advances set out certain covenants, which required a working capital ratio of a least 1:1, tangible net worth of $100 million, a Project Life Ratio (PLR) of more than 1.8 and a Loan Life Ratio (LLR) of more than 1.5.

3.8 With the fall in the copper price, the Group was faced with the possibility that it might be in breach of the above covenants. By the end of December 1998 the Group’s current ratio had reduced below 1:1. The carrying value of Selwyn was reduced by $25 million in the Half Yearly Report to 31 December 1998 (Half Yearly Report).

3.9 Rothschild’s view of the Group’s mining operations is set out in its two faxes dated 9 November 1998 and 8 December 1998. The initial indications from the faxes were that the Rothschild review might be unfavourable.

3.10 In the fax of 9 November 1998, Mr Spencer of Rothschild raises a number of “technical issues” regarding the Group’s mining operations. The fax states that Selwyn is possibly cash flow negative and would have little value in a conventional banking model. Mr Spencer concludes that “Australian Resources is a high cost producer with relatively short mine lives based on current reserves.”

3.11 In the fax of 8 December 1998, Mr Spencer calculates a notional negative cash flow of $2,367,974 for Selwyn for the four months ended 31 October 1998, at the December 1998 copper price. The Group had limited alternatives available to it. If it sought to place Selwyn on ‘care and maintenance’, this would crystallise significant liabilities for the Group, including redundancy payments, foreign exchange hedging losses and the Glencore loan.

3.12 By the end of February 1999, the Rothschild review had not been completed because the Group had not provided the information that Rothschild required for the review, including the information relating to the underground mine at Cockburn Deeps (the Group had ceased mining operations at the Cockburn Underground in December 1998). The value of the McClure mine would be affected if it was no longer viable to mine the Cockburn Deeps.

3.13 In my opinion, there were no material sources of funding available to the Group that would have enabled it to obtain relief in the short to medium term from its impending liquidity crisis. Based on the faxes of 9 November 1998 and 8 December 1998, it appeared unlikely that Rothschild would have been willing to advance funds to the Group. The Group had limited other possibilities available to it to extract itself from its financial difficulties.

(i) The copper price had fallen from the levels achieved in the 1998 financial year and this was affecting the viability of the Selwyn mine. The Group’s copper hedges had become inoperative.

(ii) The Group had incurred operating losses in the five months from July to November 1998.

(i) The Group had no reliable forecasts available to it as there had been significant changes at each of the mines.

(ii) The Group was experiencing liquidity problems and had been required to access the Rights Issue Proceeds (which had been raised for exploration purposes) to pay trade creditors.

(iv) ARL had been given additional notice of a claim of over $15 million by Leighton, which constituted a material contingent liability.

information of a material nature that could affect the financial position, capital structure or operations”

His report addresses the changes in the financial position and mining operations of ARL and the information that was made available to the Directors in the time period July to December 1998, relevant to these changes.

The overview of his executive summary included the following :

Ref: Ernst & Young Report by Mr Gibbons dated February 2007 (Gibbons tab 1)

b) By November 1998 there had been significant changes in the prospects, plans, areas mined, profitability and reserves estimations at each of the mines, which impacted negatively on ARL’s financial position, profitability and mine longevity position, such that the position by November, and even more so by December, had deteriorated considerably compared to the picture presented by the ARL 1998 Annual Report (‘Annual Report’).

…

g) ARL’s major financier, RL Rothschild Australia Pty Ltd (‘Rothschild’), was conducting an annual review of ARL’s mines and the indications were that the outcome would be negative. ARL did not have available, and was unable to prepare, life of mine plans which reflected the changed nature of the operations and future planning. These plans had been requested by Rothschild in order to finalise its review. Other technical information requested by Rothschild was unable to be provided. Rothschild had conducted a detailed analysis showing that the life of the mines was short and that the Selwyn Mine (‘Selwyn ’ ) was incurring substantial losses each month due to the fall in the copper price.

h) ARL was not generating cashflow for necessary exploration to extend the life of the mines or to pay its trade creditors.

iii. Mrs Cuthbert was, in November and December 1998, the Directors and Officers Insurance Manager for New South Wales for the company which became CGU. She was the underwriter who considered the proposal for renewal which she discussed with the National Directors and Officers Underwriting Manager, Mr Acance, to seek his approval to quote the renewal. She had reported to Mr Acance on underwriting matters.

The plaintiff's case in reply

84 The plaintiff called the following witnesses in its case in reply:

i. Mr Roberts, who had joined the ARL group as chairman in July 1993 and who had remained a director after Mr Pearce took over as chairman of ARL in 1997. Mr Roberts became a director of Arimco on 4 March 1999. He had attended board meetings of AOL and was also a member of the ARL audit committee;

ii. Mr Ryan, who had joined the ARL group in late 1992 and in January 1997 was appointed managing director of ARL, holding that position until he left the group in February 1999. He was director of Arimco during the same period. From late December 1998 he was advised that he was to be replaced as managing director of ARL and his services were to be terminated. Hence all decisions of any significance after late December were made by Mr Pearce, the chairman;

85 In passing I note that it has not been necessary formally to list the affidavit evidence of witnesses not required for cross examination. Naturally all of the evidence is taken into account in the reasons which follow.

Dealing with the disclosure and misrepresentation issue

The material provisions of the Insurance Contracts Act

86 The non-disclosure and misrepresentation issue accounted for the vast bulk of the factual evidence mobilised by both parties.

87 It seems convenient at this early stage in these reasons to make some reference to the relevant provisions of the Insurance Contracts Act which inform the non-disclosure/misrepresentation cases.

Section 21

88 By section 21 of the Insurance Contracts Act, the directors were obliged to disclose to CGU:

(a) (the directors know) to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or

(b) a reasonable person in the circumstances could be expected to know to be a matter so relevant.”

89 Section 21(2) provides that the directors were not required to disclose matters:

(a) that diminish the risk;

(b) which are common knowledge;

(c) which are known to the insurer in the ordinary course of business, or which the insurer ought to know; or

Section 28

90 To the extent that the directors failed to comply with the above-described obligation, or misrepresentations were made to CGU before the contract of insurance was entered into, section 28 operates to reduce the liability of CGU to the amount that would place it in the position that it would have been in had the directors complied with their obligations of disclosure, or the representations not been made.

The multi-stage process

91 It is of assistance to thumbnail sketch the multi-stage process in terms of the questions to be asked in respect of the factors of significance identified by CGU as having had to be disclosed. The questions which arise in relation to each of those factors may be put as follows:

(a) did the directors know of the matter?

(b) if so, did the directors know that the issue was a matter relevant to the decision of the insurer whether to accept the risk and if so on what terms?

(c) if they did not, would a reasonable person in these circumstances be expected to know the issue was so relevant?

(d) if either (b) or (c) apply, was the company excused from the need to disclose on the basis of the matters in section 21(2)?

(e) even if the matters ought to have been disclosed or there had been a misrepresentation, would the insurer have issued the policy in the way it did in any event?

An analysis of the legislative history and judicial application of ss 21 and 28

92 Sections 21 and 28 of the Act were enacted following an Australian Law Reform Commission, Report No. 20, 1982 on Insurance Contracts.

93 A convenient summary of the legislative history is contained in the judgment of McHugh, Kirby and Callinan JJ in Permanent Trustee Australia Limited v FAI General Insurance Company Limited (in liquidation) (2003) 214 CLR 514 at 527-529:

The applicable provisions of the Insurance Contracts Act :

the insured's assessment of the risk.

:

which is material to assessing the risk

:

"59. Present Law — An insured is required to disclose to the insurer all material facts relating to the insurance he proposes to effect and which are material to the insurer's assessment of the risk he is incurring or as to the premium he should charge. At common law, some lines of authority support the proposition that the insured's obligation is to disclose every material fact known to him and which a reasonable man would realise to be material. Other authorities, and particularly more recent Australian cases have rejected this approach in favour of the `prudent insurer' test i.e. a fact is material if it would have reasonably affected the mind of a prudent insurer in determining whether it will accept the insurance, and if so, at what premium and on what conditions.

(1) which are known, or presumed to be known, to the insurer;

(2) which are of common knowledge;

(3) which tend to diminish the risk;

(4) which are covered by or dispensed with by a warranty or condition; or

in his decision to accept the risk and, if so, on what terms

(1) that diminishes the risk;

(2) of common knowledge;

(3) that the insurer knows or in the ordinary course of his business as an insurer ought to know; or

ameliorates

94 Prior to the enactment of the Insurance Contracts Act, the common law test was that of the “prudent insurer”. That approach is exemplified in cases such as Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228.

95 In the years following the enactment of the Insurance Contracts Act there was some uncertainty as to whether the “prudent insurer” test was to be incorporated into section 21: see Toikan International Insurance Broking Pty Ltd v Plasteel Windows Australia Pty Ltd (1989) 15 NSWLR 641 at 649; Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989) 5 ANZ Ins Cases 60-933; Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd [1990] VR 919 at 923.35-50.

96 The position was clarified by the New South Wales Court of Appeal in Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd [2001] 50 NSWLR 679. The leading judgment was delivered by Handley JA (with whom Meagher and Powell JJA agreed).

97 At 686-687 his Honour stated:

“31 A further consideration which makes the previous law irrelevant for present purposes is that s 21(1) (a) refers to "the insurer". The test of materiality under the previous law was whether the fact would reasonably have affected the mind of a prudent insurer: see Barclay Holdings (Australia) Pty Ltd v British National Insurance Co Ltd (1987) 8 NSWLR 514 at 516, 522, 526 which approved that test as formulated by Samuels J in Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228 at 239.

32 Section 21(1) (a) substituted a test of relevance, contains no express requirement of reasonableness, and refers to "the insurer", not "a prudent insurer".

33 The construction of the section is not free from authority. In Toikan International Insurance Broking Pty Ltd v Plasteel Windows Australia Pty Limited (1989) 15 NSWLR 641 at 649, Samuels JA, in a statement that was not necessary for the decision, said that the test of "materiality" (sic) was still that of "a prudent insurer" as formulated in Mayne Nickless Ltd v Pegler .

34 In Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989) 97 FLR 284 at 296 , Rogers CJ Comm D followed this dictum although it had been questioned by commentators and the defendant had submitted it was incorrect.

35 In Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd [1990] VR 919 at 923, Brooking J referred to Ayoub but concluded that the hypothetical prudent insurer had been banished by s 21(1) which confined attention to the particular insurer concerned. In Macquarie Bank Ltd v National Mutual Life Association of Australia Ltd (1996) 40 NSWLR 543 at 612-614, Powell JA, who wrote for the Court on this question, endorsed the view of Brooking J, and this Court reaffirmed that view in Commercial Union Assurance Co of Australia Ltd v Beard (1999) 47 NSWLR 735 at 745-746.

98 Although the decision of the New South Wales Court of Appeal was overturned by the High Court in Permanent Trustee supra, the approach set out above in the judgment of Handley JA was not overturned. Although the majority of the High Court (McHugh, Kirby and Callinan JJ) did not in express terms adopt what was said by Handley JA as set out above, it was nevertheless implicit in their judgment that it is the decision of the particular insurer that is relevant (see e.g. pars. [23]- [25] [extracted above]). That circumstance has now been affirmed by the recent decision of the High Court in CGU Insurance Limited v Porthouse ([2008] HCA 30, 30 July 2008), which is referred to below.

99 Returning to Permanent Trustee, the majority [McHugh, Kirby and Callinan JJ] said [at 30-33]:

[30] The first matter to notice about s 21(1)(a) is that “every matter that is known to the insured” is qualified by the expression “being a matter that the insured knows …”. The word “knows” is a strong word. It means considerably more than “believes” or “suspects” or even “strongly suspects” . And the matter, to answer the description that para (a) of the subsection states, must be a matter that is not only “relevant to the decision of the insurer whether to accept the risk, and if so, on what terms”, but also one that the insured knows to be such a matter . The alternative for which para (b) of the subsection provides, is also important: if the insured does not “know”, the question becomes, whether a “reasonable person in the circumstances” would “know [the matter] to be a matter so relevant” . It is also noteworthy, particularly if it should become necessary to deal with the other grounds of appeal, that the knowledge of which the subsection speaks, either actual or constructive, is the knowledge of the insured, and not of any insurance intermediary, a term defined by the Act and clearly embracing an agent of the kind that Sedgwick was. This is at least to suggest that the reference to the insured is intended to be a reference to the insured personally and not to its agent or broker. However, it is not essential to our reasons to determine this point…

[32]

The words, “accept the risk” are key words.

Another indication that the decision, whether the matter should be disclosed, is a decision about the relevant risk, rather than, for convenience, what we will call the “commerciality” of the contract of insurance, is given by the reference in s 21(2) of the Act to the “disclosure … that diminishes the risk”.

upon the

risk

, ie the particular insurance hazard

risk

284 The Court accepts that certain of the answers given in cross examination of Mr Acance favoured the liquidator’s case. But the cross examiner’s questions in relation to those answers were extremely carefully elicited, again with an eye to quarantining one or other particular area for close consideration. Nonetheless, the difficulty for the liquidator is that there remained many significant areas where Mr Acance could not be shaken from his evidence that, had particular matters been disclosed, he would not have issued the policy without an insolvency exclusion. These areas include the Rothschild review and the use of rights issue funds to pay general creditors.

285 Under cross examination Mr Acance was challenged in relation to the evidence that he had given that had there been any indication that Arimco might have financial difficulties or become insolvent during the period of the insurance, he definitely would not have approved the renewal on the same terms but would have offered the insolvency exclusion. It was put to him that he would not have offered the insolvency exclusion merely if he had perceived that Arimco might have financial difficulties in the Policy year. His answer was that this was incorrect [transcript 358].

286 Although Ms Cuthbert obviously had problems in recalling the detail of a number of the events of the time, I formed the view that she was careful in her endeavours to acknowledge where she was unsure and generally gave reliable evidence.

287 Even though one remains in the world of speculation and reconstruction, the balance of probabilities heavily favours the Court’s finding that these answers are reliable. The real problem with the liquidator’s case inheres in the strength of the evidence that material matters were not disclosed and [notwithstanding some success in cross examination, of Mr Acance in particular] its inability to successfully challenge his central tenet [stemming from his sharp eye for accurate answers to question 10 of the proposal] that he would have treated the application quite differently had a positive answer been given to this question. In short, the disclosure to him of the sundry indicators [set out in these reasons] that Arimco was in a precarious financial position, and might have financial difficulties or become insolvent during the period of the insurance would have resulted in his not having approved the renewal without an insolvency exclusion.

The Leighton claim

288 The one exception to the general acceptance of Mr Acance’s evidence is with respect to the Leighton claim.

289 Ms Cuthbert’s evidence in respect to the Leighton claim was that, if she had been made aware of the claim she would have raised it with Mr Acance and asked for further information. When further details surrounding the claim were put to her on cross examination, she admitted that it was possible that the policy would have been issued with a specific exclusion for the Leighton claim, and without an insolvency exclusion. She maintained, however, that she would have raised the matter with Mr Acance and been guided by him.

290 Mr Acance gave evidence that if he had been aware of claim by Leighton against the company then [even if no other relevant matters had been disclosed] he would only have agreed to approve the renewal with an insolvency exclusion. His evidence was that he regarded this claim as a major risk, as he knew Leighton by reputation as a strong litigator that would not back away from litigation.

291 The finding is that, on this issue, Mr Acance’s evidence was contradicted by relevant documentary evidence. Specifically, Mr Acance was taken on cross examination to a document described as ‘Underwriting File 7’. This file concerned an application for insurance approved by Mr Acance in which the company seeking insurance had disclosed that they were facing a claim against them for NZ $60.5 million, which exceeded their shareholders equity of $47.4 million. The file demonstrates that in this case, Mr Acance expressly considered imposing an insolvency exclusion, but rejected this in favour of a specific exclusion of the claim.

292 Mr Acance’s explanations for the approach in Underwriting File 7 was that the reason for this specific exclusion was that there would not be an aggregation of the claim from one year to the next, that the insured had $39 million sitting in the bank, and that if there was any insolvent trading claim it would only extend over a very short period on the basis that if they lost the claim they would have to pay the money immediately.

293 But the better evidence is the blackboard note made by the underwriter on the underwriting file after discussing the notified claim with Mr Acance – to the effect that the standard specific exclusion used by CGU would protect it in the circumstances. The terms of that standard exclusion were certainly wide enough to cover any indirect claims arising from the insolvency caused by the notified claim. Whether that was correct or not, the evidence is that that is what CGU believed was the case and that application of the specific exclusion was its practice as demonstrated by the evidence of the underwriting file.

294 Given the concerns expressed above about the reliability of witness testimony which has been degraded by time and affected by hindsight, and despite the finding that Mr Acance’s evidence was honestly given and for the most part highly reliable, the documentary evidence with regards to this issue must be preferred.

Conclusion as to CGU’s position had the relevant matters been disclosed

295 The balance of probabilities is in favour of CGU [had it known all the material facts which should have been disclosed] not having renewed the policy without imposing the insolvency exclusion.

296 With respect to the Leighton claim, the finding is that had the Leighton claim alone been disclosed to CGU, the probabilities are that CGU would have issued the policy with a specific exclusion for the Leighton claim.

The effect of sub-sec. 6(4) of the Law Reform (Miscellaneous Provisions) Act

297 By reason of the above findings it becomes strictly unnecessary for the Court to deal with the arguments put forward by CGU resting upon the basis of sub-section 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946.

298 Nonetheless against the prospect that the matter may go forward on an appeal I propose to deal with at least certain of the contentions put by CGU.

299 Sub-section 6(4) provides:

in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the court shall have the same powers, as if the action were against the insured

300 CGU has contended and I accept that:

i. CGU has the same rights as the insureds, i.e. the same rights as the directors: this is a protection for the insurer built into sub-sec. 6(4): see Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399 at 447.7 per McHugh and Gummow JJ; Brennan CJ, Deane and Dawson JJ agreeing at 415.9.

ii. The purpose of the subsection is to assimilate proceedings against the insurer to those against the insured: Kinzett v McCourt (1999) 46 NSWLR 32 at 49 [89] per Spigelman CJ.

iii. The insurer “is put into the shoes of its insured”: Ratcliffe v VS & B Border Homes Ltd (1987) 9 NSWLR 390 at 397 (Hunt J); see also Almario v Allianz Australia Workers Compensation (NSW) Insurance Ltd (2005) 62 NSWLR 148 at 155 [38] (Ipp JA; Hodgson JA and Hunt A- JA agreeing) and the cases there cited.

301 CGUs submits and I accept that the effect of the Terms is as follows:

a) the directors agreed to the entry of judgment against each of them in the amount of $15,000,000 (clause 1(a));

Corporations Act

1. $270,000 from Messrs Swan, Smith and Roberts;

2. $30,000 from Ms Stubbs;

(clause 2(a) (i)-(iii));

c) Messrs Swan, Smith and Roberts agreed to pay a further $180,000 within 28 days of the termination of the proceedings in favour of CGU (clause 2(a) (iv)). This payment will not be required if, and only if, the directors perform their obligations under the Agreement and the liquidator either obtains judgment against CGU or reaches a compromise with CGU (clause 3);

d) the liquidator agreed (subject to clause 3, dealing with the $180,000) not to enforce the balance of the judgment against directors who performed all of their obligations under the agreement (clause 2(b));

e) the liquidator agreed to discharge the judgment if, and only if, the proceedings terminate in favour of the liquidator, the liquidator reaches a compromise of the proceedings against CGU or the proceedings terminate in favour of CGU (clause 4);

Corporations Act

302 Apparently it is common ground that:

i. the directors complied with their obligation under clause 2(a): see Notice to Admit Facts dated 18 June 2008 and response [CB 8/2669-71]. This means that the liquidator has received payments totalling $320,000 and that they were made within the required period after creditor approval;

Dealing with the first group of submissions

303 The first submission explains the effect of the terms and their subsequent performance as follows:

a) First , the liquidator has received $320,000 pursuant to clause 2(a) (i)-(iii).

b) Secondly, the liquidator would be entitled to a further $180,000 pursuant to clause 2(a) (iv) within 28 days of any termination of the proceedings in favour of CGU .

Thirdly

304 There are then said to be are several reasons why the liquidator is unable to enforce the judgment:

a) The first reason is that it is a condition precedent to the enforcement of the judgment that a party have failed to perform all of his or her obligations under the Terms (clause 2(b)). That condition has not been satisfied. The directors were obliged to consent to the entry of judgment and to pay the amounts prescribed in clause 2(a). As noted above, they have done so. It follows that the liquidator cannot enforce the judgment against the directors.

b) The second reason is that the condition referred to above [dealing with the undertaking to pay a further $180,000 within 28 days of the termination of the proceedings in favour of CGU and the circumstances in which that payment would not be required] can only be not complied with if CGU is found to be not liable to the liquidator. Accordingly, on the assumption, upon which consideration of the effect of the Terms must logically be approached that CGU is otherwise liable to the liquidator, there is a now unconditional restriction upon the liquidator enforcing the $15m judgment.

third

i) the proceedings terminate in favour of the liquidator;

ii) the liquidator reaches a compromise of the proceedings against CGU; or

Decision

305 In my view the third of these reasons is of substance. Critically these three events cover the field of possible outcomes. It follows that the liquidator has agreed to discharge the judgment regardless of the outcome of the proceedings.

306 In the result liquidator is seen to have contracted for the entry of a judgment but has:

i. relevantly agreed not to enforce the judgment and

The further alternative arguments put by CGU

307 To my mind it is unnecessary to determine either the substance of the contentions set out above as the ‘first’ and ‘second’ reasons why the judgment could not be enforced nor the further alternative arguments put by CGU. I propose however to shortly summarise those further arguments.

308 The second and alternative argument runs as follows:

a) the liquidator has compromised the proceedings against the directors for $15,000,000;

b) the cause of action has merged into the judgment, and no longer has an independent existence: Chamberlain v Deputy Commissioner of Taxation (1988) 164 CLR 502; Blair & Anor v Curran (1939) 62 CLR 464 at 532 (Dixon J), Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 at 597, 611;

309 The third argument is that the authorities support the proposition that it would not be conscionable to permit an insured or a third party [as plaintiff with leave to proceed under the Law reform miscellaneous provisions Act 1946, s 6] to allege against the insurer a matter which contradicts the basis upon which the plaintiff’s entitlement to recover from the insurer was determined. In short the proposition was that a plaintiff was not permitted to approbate and reprobate. Particular reliance was placed upon VACC Insurance Co Ltd v BP Australia Ltd [1999] NSWCA 427: at 27-32.

310 CGU contended that the approach taken by the liquidator to this litigation indeed involved the taking of inconsistent stances where the liquidator was seen to have approbated and reprobated. The argument runs by commencing with the proposition that CGU is to be pictured in the shoes of the insured, namely the directors. The proposition is that the liquidator, as third party plaintiff, is seen to have reached an agreement with the insured to take a limited amount: albeit at the same time denying that agreement when it comes to sue the insurer.

Dealing with the section 588G and 588M issues

The principles

311 Pursuant to section 588G(2) of the Corporations Law the plaintiff must prove facts which gave a person seeking properly to perform the duties of a non-executive director of the company reasonable grounds to say: “I suspect that the company is insolvent”: Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 124 (with due modification to take account of the wording of the current section). In Australian Securities and Investments Commission v Plymin (2003) 46 ACSR 126, Mandie J said (at [423]:

312 For the purposes of section 588G(2)(a) the plaintiff must prove that the directors were aware of certain matters and facts giving rise not to an actual suspicion of insolvency but which constituted reasonable grounds for such a suspicion: Plymin at [426]. Statements by the directors as to whether and when they actually formed a suspicion are therefore irrelevant.

313 For the purposes of section 588G(2)(b) it is sufficient that a reasonable person in a like position to the particular director in the company, in the company’s circumstances, would be aware of the facts and matters constituting reasonable grounds for suspecting insolvency, and it does not matter that the director was not actually aware of the of those facts and matters. Sub-section 588(2)(b) applies to cases where the directors did not know of the relevant facts and matters because they had failed to ascertain them, but a reasonable person in a like position would or ought to have ascertained those facts and matters: Plymin at [426].

314 Section 95A of the Corporations Law defines insolvency as inability to pay all the person’s debts as and when they become due and payable. Suspicion of insolvency therefore depends on the view a reasonable director would take, not just of the balance sheet, but of the existing debts, the time when they are all due to be paid and the company’s present and expected cash resources (see Ford, Principles of Corporations Law, 13th ed (2007) at [20.100]).

315 The type of suspicion required to be found for the purposes of section 588G(2) is more than a mere wondering as to insolvency; it requires a view or a mistrust of appearances as to ability to pay debts to be formed, even if the evidence is insufficient to warrant a positive belief: ASIC v Plymin at [427]. Belief in insolvency on the balance of probabilities is not the test.

The preconditions for liability

316 The preconditions for liability set out in section 588G(1) were established by the evidence. The relevant defendant directors remained directors of Arimco throughout the period when the debts relied on by the plaintiff were incurred, save for Mr Ryan who resigned as a director on 4 March 1999 and Mr Roberts and Mr Smith who became directors of Arimco on that date.

317 CGU has admitted that Messrs Roberts and Smith, in their capacity as directors of ARL throughout the relevant period, acted as directors of Arimco as well due to the control ARL exercised over the management of Arimco. CGU has also admitted that Ms Anderson, though not an appointed director, was a “director” in the extended meaning of that term under the law.

318 The directors were aware of the following matters during January 1999 or at least by the time of the Board meeting held on 3 and 4 February 1999 or shortly thereafter:

a) bad weather;

b) machinery and equipment;

c) low grade ores;

ii. ARL/Arimco suffered a loss of $5.45 million in January 1999, was suffering cashflow difficulties and the rights issue funds, except for the $5.2 million on deposit with Rothschild, had been used to pay creditors (reported to the directors at the 3 February Board meeting);

iii. ARL/Arimco was not paying creditors as and when debts fell due (cashflow document dated 23.12.98 at CB 13/4320 indicating the need to withhold funds from week to week up to 16/2/98 which a reasonable person in the directors’ position would have been aware of during January 1999);

iv. the continuing drop in the copper price and its effect on ARL/Arimco (this was also reported to the directors at the 3-4 February 1999 Board meeting);

319 ARL had withdrawn $2.36 million of the rights issue funds invested with Colonial State Bank as early as 4 January 1999, and a further $3 million invested with Colonial State Bank on 1 February 1999. These funds were used to pay creditors and were (for the first time) not reinstated, resulting in the net cash position of the group moving from $10.55 million as at 31/12/98 to $5.2 million as at the date of the February Board meeting.

320 The finding is that a reasonable person in the position of the directors would have known of these transactions during January 1999.

321 As stated above, the evidence of the directors as to whether they had actually formed a suspicion of insolvency is not relevant to the questions to be determined under section 588G(2). Under that section the question is whether the facts and matters either known or which would have been known formed reasonable grounds for such a suspicion.

322 The evidence establishes that at or shortly before the February Board meeting (the Board papers being circulated to the directors a few days before each such meeting), the directors were made aware that:

i. the cash available to ARL had reduced from $11.017 million as at the end of December 1998 to $5.2 million held on deposit with Rothschild;

ii. the main reason for the reduction in available cash was that most, but not all, creditors due to be paid in January had been paid from the cash on deposit largely related to the rights issue raising in September 1998, and those funds had not been repaid and there was no immediate cash to repay them;

iii. as at the end of December 1998 there were current liabilities to creditors of $27,294,000 (not including the Rothschild facilities), and overall current liabilities of $43.05 million. Current assets included only $925,000 in receivables, and there was a deficit in working capital of $1.663 million. Receivables had markedly declined since the figure of $6.4 million in September 1998;

iv. there was no operative hedging in place for gold or copper;

v. the January gold shipments had ‘dropped off’;

vi. the failure of the copper ship to arrive in January, a matter known to the directors in January 1999 ;

vii. the copper price had continued to fall during January;

323 The knowledge of these matters gives rise to a reasonable suspicion that Arimco was insolvent.

324 From 1 February 1999 the directors of Arimco were either aware of facts and matters giving rise to a reasonable suspicion of Arimco’s insolvency (section 588G(2)(a)) or a reasonable person in their like position within ARL in its circumstances at the beginning of February 1999 would have been aware of facts and matters giving rise to a reasonable suspicion of insolvency (section 588G(2)(b)).

325 The finding is that Arimco was insolvent as at 1 February 1999 and remained so during the period.

Short minutes of order

326 The parties are to bring in short minutes of order, on which occasion costs may be argued.

MINING INFORMATION: MAJOR FACTORS

Reserves and Resources

(a) The estimation of probable reserves at Mt McClure Mine had been revised downwards by about 50% in December 1998; and

Rothschild review

2. Rothschild was the ARL Group’s financier. They were in the process of conducting ‘a thorough review of the three mines’. By a letter dated 9 November 1998 Mr Bruce Spencer of Rothschild Australia had informed ARL that in his opinion the September 1998 results indicated future cashflow problems for the Selwyn Mine and in his opinion the mines had short lives of 12-17 months.

3. In combination with the letter of 9 November 1998, by a letter dated 8 December 1998 Mr Spencer had informed ARL that in his opinion based on the results for the 4 months to October 1998 Selwyn had notional negative cashflow of approximately half a million dollars per month and requested a meeting with ARL to discuss strategies.

4. ARL was not in a position to provide to Rothschild the life of mine budgets based on current reserves that Rothschild had requested in its letter dated 9 November 1998.

Financial reporting

5. By 26 November 1998 there had been changes in the operations at and the future plans for each of the mines, such that the cashflow forecast did not accurately reflect all the actual areas being mined, or the future plans for Mt McClure or the reduced profitability at Selwyn due to the low copper price.

6. At the board meeting on 26 November 1998 the directors had called for a ‘revised budget’ or cashflow forecast to be prepared and financial forecasts were ‘postponed until the more realistic site re-forecasts are completed’. Meantime the Board had no current financial forecast to 30 June 1999.

Mt McClure

7. At Mt McClure it was planned or contemplated to proceed with a further open pit cutback. A further cutback would require substantial capital expenditure at the early stages including for waste stripping in the region of $5-10 million.

Negative Cashflow

7A. The Group had a major cashflow deficit of over $8 million as at the end of November 1998.

8. -

OTHER RELEVANT INFORMAITON

General

9. By December 1998 there had been changes which adversely affected the operations of the mines and the profitability of the Group such that the position was not as optimistic as suggested by the ARL Annual Report 1998.

10. -

10A. The monthly cashflow from ARL’s mines to November 1998 was (approximately) as shown on line 9 of Appendix 8 (Annexure D to this affidavit).

Rothschild review

11. -

12. If the outcome of the Rothschild review was adverse, Rothschild would not be likely to extend the expiry of its facilities due in July 1999 and the McClure Facility repayments would commence in January 1999 at $500,000 per month.

Selwyn Mine

13. Copper sales provided about 60% of Selwyn’s revenue. By November/December the US$ copper price had fallen to approx 10% below forecast. ARL’s FX hedging was not offsetting the price falls due to a raising A$.

14. US$ copper prices had been falling since July 1998 and by December 1998 the price of copper at about US$ 0.67 cents/lb was below US$1500 per tonne which was a 12 year low.

15. Selwyn profitability had been trending down since July 1998 with negative cashflow over the period October to December 1998, including a loss of $1.2 million in October 1998 against a forecast loss of $127,000.

16. The falling copper price was reducing the profitability of the Selwyn Mine which could be losing in the region of 500,000 per month.

17. At Selwyn gold accounted for the balance of about 40% revenue. The 276 deposit was one of Selwyn’s major ore sources. It was budgeted to produce relatively high head grades. 276 grades had been falling since October and were well below budget.

18. The Annual Report had described 276 as having potential for expansion however it had not lived up to its promise. By December 1998 the 276 reserves had been downgraded by about 50% and these would likely be exhausted by about July 1999.

19. Selwyn Mine had become unprofitable and might need to be put on care and maintenance within the next 12 months if the copper price did not improve, or it continued to fall. C & M costs could be around $10 million.

Mt McClure

20. The Annual Report had stated that 1999 production would come from the ‘high-grade underground operation’ at Cockburn Deeps and that ‘work is well in hand to see this project in production by early 1999’. However the results were not achieved at the early development stage and in December the project had been abandoned.

21. Mt McClure reserves and resources schedule had been revised downwards in December 1998 with substantial downward revision of the Cockburn Underground resources.

22. Instead it had been decided to proceed with the Cockburn Open Pit Cutback stage 3. This was a complete change in direction of mining at Mt McClure, from an underground operation expected to produce high-grade ore to a further cutback of the pit which would produce lower grade ore.

23. The then current open pit operations (stage 2) were scheduled to complete in February or March 1999 and the stage 3 cutback was not expected to come into significant production until about July 1999. IN the meantime Mt McClure production would drop significantly.

24. Rothschild had expressed “low confidence’ in the stage 3 cutback and the decision was likely to have an adverse impact on the annual review in progress by Rothschild.

Gidgee

25. The Annual Report had stated that production would come from the high-grade underground operation at Swan Bitter Deeps however the reserves were only sufficient for about 6 months.

26. The Annual Report had stated that production would come from Mt Townsend however the grades were well below the 6.6 g/t budgeted and stated in the Annual Report.

27. Gidgee was below forecast and had exceeded its exploration budget by about $100,000.

28. Gidgee Mine would be exhausted by about mid 1999 and would need to be closed within the next 12 months. Closure costs would be substantial.

FINANCIAL INFORMATION: MAJOR FACTORS

1. The ARL directors had recognised that the Group’s financial forecast needed revision, and had called for a revised budget and re-forecasting from the mines. Until that was done, the Board had no accurate financial prediction for the next 6 – 12 months.

2. ARL Group’s cash resources (excluding the rights issue proceeds) had reduced by $3.034 million between 1 July 1998 and 31 October 1998.

3. In combination with item 4 below, that Group net current assets (excluding the rights issue proceeds) had fallen to a negative $2.169 million, whereas they were positive at 30 June 1998.

4. There was potential for ARL to breach the covenants in its facilities with Rothschild and not be able to correct the breach (being the shareholders equity covenant and/or project life ratio covenant and/or loan life ratio covenant).

5. ARL had been given notice of a claim in the region of $13-$15 million by Leighton and the Group did not have the funds available to pay a claim of that magnitude.

5A. The Group had a major cashflow deficit of over $8 million at the end of November 1998.

OTHER RELEVANT INFORMATION

Selwyn

6. The copper price had fallen so low that it was adversely affecting Group profits and liquidity.

7. The Group’s copper hedge contracts had become inoperative.

8. Selwyn profitability had been trending down for the last 4 months prior to November with an unbudgeted loss of about $1.2 million in October.

9. The fall in the copper price had potentially reduced the carrying value of the Selwyn Mine by about $43 million on a pre-tax basis.

10. The Selwyn mine was losing approximately $500,000 or $900,000 per month. If Selwyn were placed on care and maintenance, this would result in redundancy payments, crystallise the hedging losses which in March 1999 were around $6.4 million and require the repayment of the Glencore loan which in February 1998 was around $2.3. The Group was not able to make these payments. A sale of the Selwyn mine was seen as unlikely.

Mt McClure

11. The Cockburn Deeps project, which has been reported as a major project in the Annual Report, was not proceedings.

Gidgee

12. The head grade being achieved at Gidgee was significantly below budget.

General

13. The Group’s operations were behind budget.

14. There had been an overall deterioration in the financial position from a profitable company to a company that was making losses.

15. The Group made a low of $1.037 million in November 1998 against a budgeted profit of $1.014 million, a variance of over $2 million.

16. -

17. -

18. The Group was facing severe liquidity problems towards the end of a calendar year 1998, in combination with item 19.

19. ARL was beyond the extended payment terms for some of its creditors and was holding back cheques each month, in combination with item 18.

20. -

21. -

22. -

Rothschild Review

23. Rothschild, who was the major source of debt funding to the Group, was in the process of reviewing ARL’s facilities at the end of calendar year 1998. The initial indications, as evidenced by faxes of Mr Spencer dated 9 November 1998 were not favourable.

(a) the expire date for the McClure Facility of $5.2 million would be 31 July 1999 and little likelihood that the facility would be termed out.

(b) the expire date for the $3.5 million Multi-Option Facility agreement (Overdraft Facility) would revert to 31 July 1999.

Decrease in value of mining assets

25. The copper price had fallen to a ten year low with a consequential reduction in the value of the Selwyn mine sufficient to affect the ratios in the Rothschild Facilities.

26. The half yearly report for the period ended 31 December 1998 recorded a reduction of $25 million ($16 million on an after tax basis) in the carrying value of Selwyn. This had the effect of reducing the net worth of the Group from $139.121 million to $123.121 million.

27. The Annual Report reflects the carrying values of the mines at $115.798 million. A valuation of $57 million would have necessitated a write down of $58 million, which would have reduced the net assets of the Group from $123.121 million to $65,121 million.

Potential breach of the Rothschild covenants

28. The cashflow forecast considered by the Board at its meeting on 26 November 1998 predicted that the current ratio would fall below a ratio of 1, the ratio required by the Rothschild facility.

29. By 31 December 1998, the current ratio was 0.92, which was below the ratio of 1 required by the Rothschild facilities (a temporary waiver had been given by Rothschild).

30. Using the gold and copper prices at November, the value of Selwyn according to the Table was about $15 million (excluding exploration potential). At this value there would be a potential breach of the covenant in the Rothschild Multi-Option Facility concerning shareholders equity, which required the net worth of the Group must not fall below $100 million.

31. When ARL went into administration, Mr Roberts (director) provided valuations of the mines at Selwyn $20 million, McClure $30 million and Gidgee $7 million. On these valuations, the Group would be in breach of its net worth covenant with Rothschild.

32. A breach of the covenants might result in an unfavourable review and would also constitute an event of default. This could result in Rothschild demanding immediate repayment of the funds that it had advance to the Group.

Limited sources of further funding

33. There was little chance that sufficient short-term funding was available to alleviate the Group’s liquidity problems.

34. By November and December 1998, the Group had limited alternatives available to it to extricate itself from its financial difficulties.

Exploration

35. The Group was dependent on continuing exploration because of “relatively short mine lives”. Successful exploration was essential to prove up resources to reserves and extent mine life.

36. If the rights issue funds, which were earmarked for exploration were used to pay creditors, as occurred in about January 1999, ARL would be unable to delineate further reserves and this would have adverse consequences for the future operations of the Group.

Contingent liability

*************

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Citations

Martin John Green in his capacity as liquidator of Arimco Mining Pty Limited (in liquidation) v CGU Insurance Limited [2008] NSWSC 825

Most Recent Citation

Martin John Green in his capacity as liquidator of Arimco Mining Pty Limited (in liquidation) v CGU Insurance Limited [2008] NSWSC 929

Cases Citing This Decision

2

New Cap Reinsurance Corporation Limited (in liquidation) v Daya [2010] NSWSC 1226

Martin John Green in his capacity as liquidator of Arimco Mining Pty Limited (in liquidation) v CGU Insurance Limited [2008] NSWSC 929

Cases Cited

19

Statutory Material Cited

4

Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (In Liq) [2003] HCA 25

Fightvision Pty Ltd v Onisforou [1999] NSWCA 323

Toikan International Insurance Broking Pty Ltd v Plasteel Windows Australia Pty Ltd [1989] NSWCA 212

CITATION:	Martin John Green in his capacity as liquidator of Arimco Mining Pty Limited (in liquidation) v CGU Insurance Limited & Ors [2008] NSWSC 825
HEARING DATE(S):	14/07/08-18/70/08, 21/07/08-24/07/08, 28/07/08, 4/08/08-5/08/08
JUDGMENT DATE :	18 August 2008
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	Einstein J
DECISION:	Parties to bring in short minutes of order.
CATCHWORDS:	Insurance - Insurance Contracts Act - Directors and Officers liability - Insolvent trading claim under section 588 M Corporations Law brought by the plaintiff in his capacity as liquidator - Section 6 (4) Law Reform Miscellaneous Provisions) Act - Non-disclosure /misrepresentation - Relevant test that of the reasonable insured not the prudent insurer - Knowledge requires considerably more than “suspicion” or “belief” - Matter must be known to insured at the time to be a matter relevant and known to insured or a reasonable person to be relevant to the decision of insurer whether to accept the risk and if so on what terms - Legislative history of sections 21 and 28 of Insurance Contracts Act - Dangers posed by litigation proceeding through benefit of hindsight - Finding that had proper disclosure been made insurer would not have issued a policy without an insolvency exclusion - Terms of settlement reached by liquidator with directors of directors agreed to entry of judgment against each of them in the amount of $15,000,000, liquidator agreeing to receive far smaller amounts from directors presently - Terms of settlement include agreement by liquidator to discharge judgment if either the (1) proceedings terminate in favour of the liquidator or (2) liquidator reaches a compromise of the proceedings against insurer or (3) proceedings terminate in favour of the insurer - Finding that liquidator contracted for the entry of judgment but relevantly agreed not to enforce the judgment and agreed to discharge it in any event - Liquidator alleged to have approbated and reprobated - Section 588G (2) (b) of Corporations Law - Reasonable grounds for suspicion of insolvency - Belief in insolvency on the grounds of balance of probabilities not the test
LEGISLATION CITED:	Company Law Review Act 1998 (Cth) Corporations Act 2001 (Cth) Insurance Contracts Act 1984 (Cth) Law Reform (Miscellaneous Provisions) Act 1946 (NSW)
CATEGORY:	Principal judgment
CASES CITED:	Almario v Allianz Australia Workers Compensation (NSW) Insurance Ltd (2005) 62 NSWLR 148 Australian Securities and Investments Commission v Plymin and Others (2003) 46 ACSR 126 Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989) 97 FLR 284; (1989) 5 ANZ Ins Cases 60-933 Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399 Barclay Holdings (Australia) Pty Ltd v British National Insurance Co Ltd and Another (1987) 8 NSWLR 514 Blair & Perpetual Trustees Co Ltd v Curran (Adams’ Will) (1939) 62 CLR 464 CGU Insurance Limited v Porthouse [2008] HCA 30 Chamberlain v Deputy Commissioner of Taxation (ACT) (1988) 164 CLR 502 Commercial Union Assurance Co of Australia Ltd v Beard (1999) 47 NSWLR 735 Commonwealth Bank of Australia v Friedrich (Friedrich/National Safety Council case) (1991) 5 ACSR 115 GIO General Ltd v Wallace (2001) 11 ANZ Ins Cas 61-506 Guthrie House Ltd v Cornhill Insurance Co Ltd (1982) 2 ANZ Ins Cas 60-466 Kinzett v McCourt (1999) 46 NSWLR 32 Macquarie Bank Ltd v National Mutual Life Association of Australia Ltd and Others (1996) 40 NSWLR 543 Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228 Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd& Anor (1998) 153 ALR 529 Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd & Anor [2001] 50 NSWLR 679 Permanent Trustee Australia Limited v FAI General Insurance Company Limited (in liquidation) (2003) 214 CLR 514 Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 Ratcliffe v VS & B Border Homes Ltd (1987) 9 NSWLR 390 Tate & Sons v Hyslop (1885) 15 QBD 368 Toikan International Insurance Broking Pty Ltd v Plasteel Windows Australia Pty Limited (1989) 15 NSWLR 641 Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd [1990] VR 919 VACC Insurance Co Ltd v BP Australia Ltd (1999) 47 NSWLR 716
TEXTS CITED:	Ford, Principles of Corporations Law, 13th ed (2007)
PARTIES:	Martin John Green in his capacity as liquidator of Arimco Mining Pty Limited (in liquidation) (Plaintiff) CGU Insurance Limited (First Defendant)
FILE NUMBER(S):	SC 50177/04
COUNSEL:	Mr D Davies SC, Mr MS White (Plaintiff) Mr R Macfarlan QC, Ms C Needham SC, Mr S Goodman (First Defendant)
SOLICITORS:	Henry Davis York (Plaintiff) Kennedys (First Defendant)