Swiss Re International SE v Simpson

[2018] NSWSC 233

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:	Swiss Re International SE v David Simpson [2018] NSWSC 233
Hearing dates:	31 October 2017, 1, 2, 6, 7, 8, 9, 13, 14, 15, 16, 20, 21, 22, 23, 24, 27, 28, 29, 30 November 2017, 4 December 2017
Decision date:	02 March 2018
Jurisdiction:	Equity - Commercial List
Before:	Hammerschlag J
Decision:	The proceedings are dismissed.
Catchwords:	CONSUMER LAW – Competition and Consumer Act 2010 (Cth) – Schedule 2, ss 18(1) and 236(1) – Misleading or deceptive conduct – plaintiff insurers claimed that they were induced to issue surety performance bonds for a publicly listed company by misleading or deceptive conduct on the part of the defendant individual officers of the company – misleading or deceptive conduct claimed to be representations and non-disclosures – no claim of accessorial liability – HELD: no misleading or deceptive conduct on the part of the defendants established – the alleged misleading or deceptive conduct was not causative of the plaintiffs’ loss.
Legislation Cited:	Civil Procedure Act 2005 (NSW) Competition and Consumer Act 2010 (Cth) Corporations Act 2001 (Cth) Law Reform (Miscellaneous Provisions) Act 1946 (NSW)
Cases Cited:	Awad v Twin Creeks Properties Pty Limited [2012] NSWCA 200 Barton v Croner Trading Pty Ltd (1984) 3 FCR 95 BFSL 2007 Limited & Ors (in Liquidation) v Steigrad [2013] NZSC 156 C H Real Estate v Jainran Pty Ltd (2010) 14 BPR 27,361 Cackett v Keswick [1902] 2 Ch 456 Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 Chappel v Hart (1998) 195 CLR 232 Chubb Insurance Co of Australia Ltd v Moore [2013] NSWCA 212 Commercial Union Insurance Co of Australia v Ferrcom Pty Ltd (1991) 22 NSWLR 389 Downey & Anor v Carlson Hotels [2005] QCA 199 Ellis v Wallsend District Hospital (1989) 17 NSWLR 553 Fabcot v Port Macquarie-Hastings Council [2011] NSWCA 167 March v (E & M) Stramare Pty Ltd (1991) 171 CLR 506 Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Limited (2010) 241 CLR 357 Rosenberg v Percival (2001) 205 CLR 434 Sidhu v Van Dyke (2014) 251 CLR 505 Travel Compensation Fund v Tambree (t/as R Tambree and Associates) and Others (2005) 224 CLR 627 Wallace v Kam (2013) 250 CLR 375 Wheeler Grace & Pierucci Pty Ltd v Wright (1989) ATPR 40-940 State of Western Australia v Bond Corporation Holdings Ltd (1991) ATPR 41-081
Texts Cited:	J D Heydon, Trade Practices Law (Looseleaf Service)
Category:	Principal judgment
Parties:	Swiss Re International SE and QBE Insurance (Australia) Ltd - Plaintiffs David Simpson - First Defendant Donald Montgomery - Second Defendant Andrew Bell - Third Defendant Chubb Insurance Australia Limited - Fourth Defendant Allianz Australia Insurance Limited - Fifth Defendant Axis Specialty Europe SE (registered as a foreign company under the Corporations Act 2001) - Sixth Defendant
Representation:	Counsel: R.A. Dick SC with S.A. Goodman SC, R.D. Glover and L. Rich - Plaintiffs J. Lockhart SC with J. Hutton - First Defendant A.S. Bell SC with V. Whittaker - Second Defendant C.H. Withers with P. Meagher - Third Defendant E. Muston SC with J. Dooley - Fourth to Sixth Defendants   Solicitors: DLA Piper Australia - Plaintiffs Wotton + Kearney - First Defendant Jackson McDonald - Second Defendant Kennedys - Third Defendant Clyde & Co - Fourth to Sixth Defendants
File Number(s):	2015/220467

TABLE OF CONTENTS

Introduction

History

Events leading up to the 15 November 2013 $3.85 million bond

Issue of the 15 November 2013 $3.85 million bond

The 28 November 2013 ASX announcement

The 2 December cashflow

The 3 December Assetinsure meeting

The 4 December 2013 cashflow

The 6 December 2013 QBE meeting

The 12 December Assetinsure meeting

The 12 December 2013 cashflow

The Swiss Re Risk Underwriting submission – 13 December 2013

The ATO

The QBE Credit and Surety submission – 16 December 2013

The 19 December 2013 $6 million bond

Events leading to the 11 January 2014 cashflow

Friday 10 January 2014

Saturday 11 January 2014

The 11 January 2014 cashflow

Simpson speaks to Brereton – Saturday evening, 11 January 2014

Sunday 12 January 2014

Monday 13 January 2014

The Monday evening 13 January 2014 conversation

The Banking Club

Issue of the January bonds

Events after the issue of the January bonds

The Case

The Claims and the Responses

The 15 November 2013 telephone conversation with Bell

The 28 November 2013 announcement

The 2 December 2013 cashflow

The 3 December 2013 Assetinsure meeting

The 4 December 2013 cashflow

The 6 December 2013 QBE meeting

The 12 December 2013 Assetinsure meeting

The 12 December 2013 cashflow

The 19 December 2013 $6 million bond

The 11 January 2014 cashflow

The Saturday evening 11 January 2014 conversation between Simpson and Brereton

The Monday evening 13 January 2014 conversation between Simpson and Brereton

The 13 January 2014 draft ASX announcement

Consideration

Bell and the 15 November 2013 $3.85 million bond

Simpson and Montgomery and the 19 December 2013 $6 million bond

The 28 November 2013 announcement

The 2 December 2013, 4 December 2013 and 12 December 2013 cashflows

The 3 December 2013 Assetinsure meeting

The 12 December 2013 Assetinsure meeting

Simpson, Montgomery and Bell and the January bonds

The 11 January cashflow

The Saturday evening 11 January 2014 conversation between Simpson and Brereton

The Monday evening 13 January 2014 conversation between Simpson and Brereton

The 13 January 2014 draft ASX announcement

Causation and Damage – the $6 million bond and the January bonds

Significant factors

The 19 December 2013 $6 million bond

Quantum and other questions

Conclusion

Judgment

Introduction

1. HIS HONOUR:   Forge Group Ltd (Forge) was a publicly listed company which described itself as a multi-disciplinary Engineering, Procurement and Construction (or EPC) and Asset Management service provider, delivering end-to-end turnkey solutions in the power and infrastructure, minerals and resources, and oil and gas sectors in Australia, Asia, Africa and North America.

2. According to its 2013 financial statements, as at 30 June 2013, Forge had net assets of over $213 million and had made a net profit after tax for that year exceeding $62 million.

3. Yet, on 11 February 2014, Forge failed.

4. Its shares went into a trading halt. Its securities were suspended from quotation. It was placed into voluntary administration.

5. On 18 March 2014, its creditors appointed liquidators.

6. At all times material to these proceedings, Mr David Michael Simpson, the first defendant, was Forge’s Managing Director and Chief Executive Officer.

7. Simpson holds a Diploma of Law and a degree Masters of Law and Management. He worked in legal and corporate roles at corporations before joining Forge.

8. Mr Donald James Montgomery, the second defendant, was its Chief Financial Officer. Montgomery was not a member of the board. He attended board meetings by invitation.

9. Mr Andrew Bell, the third defendant, was the Executive General Manager of Finance. Until his resignation on 26 November 2013, Bell was the public officer of Forge. He was previously company secretary. He had many years of financial management experience in the mining, oil and gas and construction industries.

10. Where I refer in this judgment to persons by their last names, I intend no disrespect.

11. Swiss Re and QBE, the plaintiffs, are insurers and reinsurers.

12. Assetinsure Pty Ltd (Assetinsure) is Swiss Re’s Australian agent and approved attorney. The relationship between Swiss Re and Assetinsure is governed by an underwriting agency agreement and a quota share reinsurance for surety business. Assetinsure acts as an insurer and reinsurer in its own right.

13. Swiss Re, QBE and Assetinsure provide security bonds for clients, which secure performance of contractual obligations. These are an alternative to security over assets or bank guarantees. I will refer to these instruments as bonds.

14. Forge, in joint venture with a Spanish company, Duro Felguera Ltd, had a substantial subcontract with Samsung C & T Corporation (Samsung) for the construction of an iron ore project in Western Australia known as Roy Hill.

15. Under the Roy Hill Contract, Forge was required from time to time to put up security in the form of on-demand, unconditional, irrevocable bonds by an Australian branch of a bank or insurance provider.

16. These proceedings concern bonds issued in favour of Samsung for the benefit of Forge in connection with the Roy Hill Contract as follows:

• 15 November 2013 Swiss Re for $3,850,000 (the $3.85 million bond);

• 19 December 2013 Swiss Re for $6,000,000 (the $6 million bond);

• 10 January 2014 (issued 13 January) Swiss Re for $20,748,825;

• 10 January 2014 (issued 13 January) Swiss Re for $20,748,825;

• 13 January 2014 QBE for $6,000,000;

• 13 January 2014 QBE for $20,748,825;

• 13 January 2014 QBE for $20,748,825.

I will refer to the bonds issued in January 2014 collectively as the January bonds.

17. The last of the bonds was thus issued less than a month before Forge’s demise.

18. Section 18(1) of Schedule 2 to the Competition and Consumer Act 2010 (Cth) (the Australian Consumer Law) provides:

(1) A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

19. References to sections are, unless otherwise stated, references to the Australian Consumer Law.

20. Section 236(1) provides, relevantly:

(1) If:

(a) a person (the claimant) suffers loss or damage because of the conduct of another person; and

(b) the conduct contravened a provision of Chapter 2;

the claimant may recover the amount of the loss or damage by action against that other person, or against any person involved in the contravention.

21. On 24 February 2014, Samsung called the bonds. Swiss Re paid Samsung $51,347,650. QBE paid Samsung $47,497,650.

22. Swiss Re and QBE say that they were misled and deceived by Simpson, Montgomery and Bell into issuing the bonds. They sue them for damages under the Australian Consumer Law.

23. Swiss Re received premiums for the bonds of $2,807,518.53 and has been paid $10,044,512.53 by the receivers from Forge assets realised. It claims as damages the amount it paid out, less what it has received, being $38,495,618.97.

24. QBE received premiums of $2,328,529.93 and has been paid $10,044,512.53 by the receivers from Forge assets realised. It claims as damages the amount it paid out, less what it has received, being $35,124,607.57.

25. I shall refer to Simpson, Montgomery and Bell collectively as the defendants.

26. The fourth and fifth defendants, Ace and Allianz are insurers of the defendants under directors and officers insurance policies.

27. Swiss Re and QBE sue those insurers directly pursuant to s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). Proceedings were also brought against the sixth defendant (Axis) but those are not pressed. I shall refer to Ace and Allianz as the insurers.

28. This case is fact-heavy.

29. The hearing occupied 21 hearing days.

30. The Court Book is 30 volumes containing over 17,000 pages. The plaintiffs’ affidavits are extensive. The defendants served affidavits but did not read any.

31. The Amended Commercial List Statement runs to 86 pages comprising 257 paragraphs. It is an instrument which does not conduce to the just, quick and cheap disposition of the real issues in this case. It contains numerous unnecessary definitions and cross-references. It repeatedly pleads misleading or deceptive conduct by pleading representations without pleading falsifications which correspond to those representations. [1] It contains lengthy factual narrative which has little role to play in the pleading of the case.

    1. See State of Western Australia v Bond Corporation Holdings Ltd (1991) ATPR 41-081 at 52,278-52,279 (per French J).

32. Different complaints, sometimes overlapping, are made against different defendants. However, leaving aside the 15 November 2013 $3.85 million bond, the same loss is claimed from each of them because of different conduct complained of.

33. Misrepresentations as to the solvency and non-disclosures as to the insolvency, or near insolvency, of Forge are asserted. However, save in a very limited way concerning 11 January 2014 – dealt with in detail later – all misrepresentations in relation to the solvency of Forge were abandoned. [2]

    2. The plaintiffs filed and served a lengthy expert report by an accountant, Mr Silvia, expressing opinions – in my view, inadmissible ones – as to the insolvency of Forge. The plaintiffs ultimately did not read this evidence, and the defendants did not read their proposed expert evidence in response.

34. In this List, whilst the Court does not operate as one of strict pleading, it is also not one of no pleading.

35. Where plaintiffs, in a proceeding such as this, wish to make significant charges of misleading or deceptive conduct with potentially very significant consequences, it is incumbent on them to articulate their case with precision; see Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Limited (2010) 241 CLR 357 at 364-5 at [5]-[7]. [3]

    3. There must be a clear identification of the conduct said to be misleading or deceptive. Where silence of non-disclosure is relied upon, the pleading should identify whether it is alleged of itself to be, in the circumstances of the case, misleading or deceptive conduct or whether it is an element of conduct, including other acts or omissions said to be misleading or deceptive.

36. The problems of resolving the issues (both factual and legal) in a satisfactory fashion were exacerbated by a number of other things.

37. The plaintiffs’ closing written submissions, including submissions supposedly in reply, run to 124 pages. They narrow the plaintiffs’ case in some respects, but impermissibly seek to change and expand it in others. Simpson, Montgomery and Bell repeatedly and justifiably complained about the attempted changes and expansions. The plaintiffs’ submissions do not deal with the complaints in the order in which they were pleaded. In some cases more than one claim is rolled up into one.

38. The evidentiary material was presented by way of a haphazard non-chronological Court Book with numerous duplicates, particularly of email chains. The difficulties this puts in the way of reciting the facts in a comprehensible fashion are obvious. [4] During the hearing, I requested the plaintiffs to produce a comprehensive chronology of events backed up with evidentiary references, and where appropriate, with documents. A document purporting to meet this request was produced but it transpired to be nothing more than a chronological index to the Court Book. The plaintiffs then produced what was said to be a comprehensive and definitive statement of their case, factually and legally, in a document entitled ‘Plaintiffs’ Amended Outline of Closing Submissions’ and a document entitled ‘Plaintiffs’ Outline of Reply Submissions’. The result was that the defendants were, somewhat unfairly, presented with the final articulation of the plaintiffs’ case (sought impermissibly to be widened) at the tail of the proceedings. It puts the Court in the invidious position of having, in final judgment, to consider whether matters (including ones put in reply) are properly in contest.

    4. Preparation of the Court Book is the joint responsibility of the parties.

39. I have had regard to all the evidence, but I have only recited the facts which I consider to be necessary for the reader to understand why I have reached the conclusions I have reached.

40. Many relevant communications took place across the time zone from Sydney to Perth. I have endeavoured to account for time zone differences and to place such communications in the order in which they were made and received.

41. I have considered all the arguments but have not restated them.

42. I refer below to ‘cashflows’. Unless the context otherwise indicates, these are a type of document usually entitled ‘Forge Group (Australian Operations) Consolidated Cashflow Forecast’, produced by Forge in a particular abbreviated form, usually incorporating a set of stated key assumptions.

43. Cashflows were prepared by consolidating forecasts prepared for each of Forge’s divisions. Divisional forecasts were in turn prepared by consolidating cashflows for each of Forge’s projects. They were prepared by a team. Bell had the main responsibility for their preparation. He reported directly to Montgomery.

History

Events leading up to the 15 November 2013 $3.85 million bond

44. In January 2012, Forge acquired an entity called CTEC Pty Ltd (CTEC). With this acquisition, came two construction projects involving power stations in Western Australia, the Diamentina Power Station (DPS) and the West Angelas Power Station (WAPS).

45. As at 21 October 2013, Forge had a bond facility with Swiss Re for $100 million which was then drawn to $91.8 million. It asked Assetinsure (on behalf of Swiss Re) for an increase in the facility to $150 million. This was approved on 21 October 2013.

46. Assetinsure expected its bond exposure to reduce by retirement of bonds to $85 million by 31 December 2013, by a further $9.4 million by 31 March 2014 and to $57 million by the end of 2014.

47. As at 22 October 2013, Forge had a bond facility with QBE for $100 million which was then drawn to approximately $80 million. It expected that by April 2014, 50% of these bonds would be retired. Forge asked QBE for an increase to $125 million. This was approved on 22 October 2013.

48. The acquisition of CTEC was not a wise one. By 3 November 2013, Forge knew that DPS and WAPS were a significant problem and were going to mulct it with massive losses. The loss estimates at that time were $50 million on DPS and $16 million on WAPS.

49. Forge’s cashflow was affected to the point that it recognised that it may need an injection of funds either through a working capital loan or an equity raising. It sought advice from investment bankers Goldman Sachs and lawyers Herbert Smith Freehills (HSF) regarding various avenues to address its disclosure obligations and immediate cash flow concerns. The proposed equity raising project was given the name Project Fiat. A due diligence committee was formed.

50. Such was the significance of the losses, that Forge’s Board of Directors resolved to request a trading halt of the company’s shares from the opening of trading on Monday 4 November 2013 and, if necessary, a suspension of trading on 6 November 2013. The Australian Stock Exchange (ASX) announced on 6 November 2013 that Forge’s shares were suspended from quotation pending the release of an announcement.

51. Minutes of the due diligence committee of 9 November 2013 record that the preliminary view was that around $60 million would be required from the equity markets.

52. On 11 November 2013, Forge requested the ASX to extend the suspension until it made a market announcement, which it anticipated would happen by 13 November 2013. Minutes of a board meeting on 11 November 2013 record a discussion about insolvency and the board needing to be satisfied that Forge had a reasonable expectation that it could pay its debts as and when they fell due.

53. By 11 November 2013, Forge had withheld an amount exceeding $14 million from the Australian Tax Office (ATO), and therefore had defaulted in complying with its Pay As You Go Withholding (PAYGW) tax obligations by not paying.

54. Forge instructed solicitors to approach the Australian Securities and Investments Commission (ASIC) to permit it to utilise the so-called ‘low-doc’ disclosure provisions in the Corporations Act 2001 (Cth) for its proposed equity raising, rather than having to issue a full prospectus which would take much longer. By 13 November 2013, however, ASIC had made it clear that no waiver would be forthcoming. This would cause a delay to the timetable in raising equity. Montgomery undertook to conduct a review of Forge’s ability to pay its debts as and when they fell due and to provide the board with a short term cashflow.

44. Bell prepared cashflows and sent them to Montgomery and Simpson. He prepared one on 14 November 2013. From 22 November 2013 to 3 January 2014, it showed significant cash deficits, before borrowings, ranging on a weekly basis from a high on 29 November 2013 of -$34.4 million to a low on 3 January 2014 of -$5.7 million.

45. Forge sought advice from KPMG, an accountancy firm, amongst others, on its solvency, on the basis of potentially raising money through an equity injection, trade sale or special situation debt raising. KPMG advised that Forge was not trading whilst insolvent as at 23 November 2013. Apparently, there had been discussions with an organisation called Anchorage, which might have been a source of equity. At a board meeting attended by management, management noted that Forge was fast running out of time and alternatives, and should request the bank to consider last resort scenarios.

46. At all times material to these proceedings, Forge’s bankers were Australia and New Zealand Banking Group Ltd (ANZ). The individual at ANZ who had principal carriage of the relationship with Forge was Mr Greg Gardiner. Other ANZ personnel were Mr Isaac Rankin and Mr Dean Travis.

47. Sometime before 5 November 2013, following a request by Forge for an extension of its overdraft facility and waivers of covenant breaches, ANZ appointed KordaMentha, an accountancy firm operating in corporate recovery, to engage with Forge on behalf of ANZ.

48. At this time, Forge had various banking facilities with ANZ including revolving guarantee facilities of $80 million, a multi-currency cash advance acquisition facility for $39 million and a general working capital facility for $11 million.

49. The board met on 14 November 2013. It noted that Simpson and Montgomery had met the previous night with KordaMentha on behalf of ANZ, who had indicated that ANZ would provide support to Forge as it worked its way through its short term liquidity concerns. The board received a paper from Goldman Sachs detailing two equity raising options. The minutes record:

Given the short term liquidity concerns, the Board requested a daily cashflow forecast from management in order to continually assess the Company's solvency. Whilst the Board was conscious of potential insolvent trading, it was satisfied that the Company was solvent. The Board noted that the Bank had outlined that if necessary, it could pay employee wages (given they are prioritised under law surrounding insolvency) as an alternative to providing an additional facility. It was further noted that the Bank would only make this option available should the current $11 million overdraft facility be fully drawn down. Mr Kempton requested management to furnish the Board with evidence that all superannuation payments were up to date.

The Board was advised that all of the Company's insurers, including in respect of professional indemnity and directors & officers indemnity insurance, had been notified of matters surrounding Project Fiat.

61. That day, Bell sent Montgomery an updated daily and weekly cashflow for the following eight weeks. Montgomery replied to Bell that it was likely that Mr Mark Mentha (of KordaMentha) would want to sit down with him the following day to analyse it to ensure its credibility. That cashflow showed a cash deficit as at 29 November 2013 of $33.8 million. Later that day, Bell sent cashflows to KordaMentha, Montgomery and Simpson.

Issue of the 15 November 2013 $3.85 million bond

62. Forge needed two advance payment bonds in favour of Samsung under the Roy Hill Contract, one for $3.85 million and one for $6 million.

63. On 14 November 2013, Forge applied to Assetinsure for the issue of a $3.85 million bond. At the time, Forge’s facility through Assetinsure had a limit of $100 million. The issue of a $3.85 million bond could be issued within the limit but an additional $6 million would exceed the limit.

64. Assetinsure had an internal watchlist, called the Amber List, of companies which had a deteriorating credit position. On 15 November 2013, Assetinsure placed Forge on the list. The Amber List had risk classification categories of low, medium and high. Forge was placed in the high risk category.

65. Mr Mark Coulson of Australian Contract Guarantee Services was Forge’s surety bond broker.

66. Mr Peter Wedgwood was the Executive Director of (and an equity holder in) Assetinsure. Mr Andrew Calvert was Head of Surety at Assetinsure and Mr Damian Gorman was Head of Credit. Mr Andrew Sim was Senior Relationship Manager, Surety.

67. On 15 November 2013 at 8am, the Forge board met. Simpson and Montgomery were present. Montgomery tabled a summary of the weekly consolidated cashflows for 10 weeks ending 10 January 2014, and noted that Forge was forecast to move to a negative cash position in the week ending 22 November 2013.

68. At about 10:30am on 15 November 2013, a telephone conference took place between Calvert, Gorman, Coulson and Bell. Calvert and Gorman both gave evidence of it. The substance of the message which Bell conveyed is the same. Gorman’s version is:

Calvert:   We were surprised by the trading halt. What is the likely impact on FY 2014 results?

Bell:   It is an unfortunate series of events and a shock to Forge as well. A number of issues in the power division had not been brought to management's attention and as a consequence key staff have moved on, including the project director, Kevin Robinson. A major 'post mortem' is being conducted, a thorough review of all projects.

We've identified two problem projects in respect of our power division, the Diamantina power project and the WAPS project. Our review has revealed cost overruns, delay and mismanagement. We are looking at a material profit write down. To deal with the problem we are investigating a capital raising of circa $62 million.

Calvert:   Will banking covenants be breached as a result of the write down?

Bell:   The covenants have not been breached as yet. However, the next testing date will be 31 December 2013. Based on where the Forge results are going there will be a breach at the time - that is the EBITDA coverage and the shareholder funds covenant. It is caused by the material write down on the projects. However ANZ remain supportive and we have good support from the ANZ.

Calvert:    How will you rebuild the balance sheet?

Bell:   We propose to do a capital raise to raise $62 million. The outlook is good, we have a large order book. We will take the hit this year, but will be very strong and healthy come the new financial year.

Calvert’s version is:

Calvert:   What is the trading halt all about, given that you have just released your annual report and we were with you a month or so ago and there were no problems raised?

Bell:   There are problems on two of our projects, DPS and WAPS with cost overruns and delays. There was mismanagement by the prior owners CTEC. We are conducting a thorough review of our projects. There are no other problem projects that have been identified at this stage. There will be a write down of about $125 million as a result.

Calvert:   Can Forge cover the write down?

Bell:   It is under control. We are looking at a $60 million capital raise or debt funding from the ANZ. ANZ is supporting us. There are no breaches of covenants. Our EBITDA and shareholder funds covenants may be breached on 31 December but that will be covered by the additional capital raise or funding from ANZ. The outlook is good and we can cover these issues. Forge is a strong company and will have a very strong performance overall going forward.

Bell:   We inherited these problems from CTEC and have only now just discovered them. It's not our fault. We are taking action. There have been big changes with management. The contracts are structurally flawed and required payments to be made before we get paid. But we have put in measures now to deal with this.

Calvert:    What about the additional bonding requirements?

Bell:   As you know we need a $3.85 million bond and a $6 million bond for Roy Hill.

Calvert:   Our facility has a current limit of $100 and while we can go ahead with the $3.85 bond, the additional $6 million bond would need approval of an increase in limit before we could issue.

Bell:   There will be a hit this year but our outlook is very positive and we will be healthy and robust going forward.

69. Gorman and Calvert were cross-examined, searchingly and at length. I have no reason to consider that they did anything other than give an honest account of their recollections and understandings. The same can be said of Sim, to whom reference is made below. Bell did not give evidence.

70. Calvert gave evidence that Wedgwood had given conditional approval for the issue of the $3.85 million bond, subject to Calvert speaking first with Forge and collating information. Calvert knew that Bell was the Group Financial Controller and Head of Treasury and that he reported to Montgomery. He had known Bell for a number of years and says he gave a lot of weight to what he said. He says he took the decision to issue the bond based upon what Bell had told him.

71. Gorman testified that Assetinsure had requested the call to ‘get comfort around the issuance of the bond’. He says that Bell did not indicate any concerns around insolvency.

72. He says that the teleconference gave him comfort because he observed Bell as being forthright and candid in discussing the problems Forge faced and in giving an assurance that the problems had been addressed and that Forge had a readily available solution, namely a capital raising and the support being provided by ANZ. He says that based on the teleconference, he supported the issue of the bond. He says that he had a discussion with Calvert to the following effect:

Gorman:   Based on the earlier discussion with Andrew Bell, I think we can issue the bond.

Calvert:   I agree.

73. Gorman says that if he had been told that Forge was or was nearly insolvent or that there were concerns as to its solvency, he would not have supported the issue of any further bonds to Forge or an increase in Assetinsure's exposure to Forge. [5]

    5. As is referred to earlier, misrepresentations as to solvency were abandoned.

74. On 15 November 2013, Swiss Re issued the $3.85 million bond in favour of Samsung.

The 28 November 2013 ASX announcement

75. The board met on 16 November 2013. The minutes record the purpose of the meeting being to receive a progress update on the resolutions being sought with respect to concerns identified in relation to potential underperformance on the DPS and WAPS projects.

76. The board met by teleconference early in the morning on 26 November 2013 for the purpose of receiving a progress update on the DPS and WAPS situation. Project Fiat was discussed. There had been extensive negotiations with an organisation called the M + W Group for a loan or possible scheme of arrangement, but at this point, no arrangement had been made. Simpson advised that ANZ had extended every concession possible to the M + W Group in an attempt to close the transaction. Management advised that it would now pursue a transaction with an organisation called Anchorage. Montgomery advised that based on cashflows which were continually being updated the company would have sufficient funds until the week ending 13 December 2013.

77. Forge’s solicitor, Mr David John of HSF, took the board through ‘the usual steps to assess’ Forge’s solvency. The minutes record that in light of Forge’s tenuous position with its key customers and short term liquidity concerns, management had requested ANZ to extend further funds to Forge, and that ANZ had stated that its Credit Department had advised that under no circumstances could it advance further funds to Forge.

78. The Chairman, Mr David Craig, noted the considerable concern of the board as to Forge’s ongoing solvency, and asked that John be in a position to advise the board as to the mechanics of voluntary administration should this be required.

79. The board met again at 1pm that day. Gardiner and Rankin of ANZ, and Mentha and Mr Scott Langdon of KordaMentha joined the meeting at some point. The minutes record, amongst other things, the following:

Mr Gardiner advised that following consideration of the Company's current predicament and the potential exposure of the ANZ Bank to the Company's solvency concerns, the ANZ Bank/KordaMentha (Bank) had agreed to offer the Company the following proposal:

•   A restructure of the Company's existing banking facilities to provide additional liquidity.

•   An increase in the Company's working capital facility from $11 million to $20 million.

• An additional $15-20 million in funding pursuant to s.560 of the Corporations Act (payment of wages). [6]

•   A proposal to involve the Company's insurance bond providers and to free up $20-30 million otherwise tied up in surety bonds.

Mr Mentha advised that the proposal would allow the Bank and the Company to control the liquidity funding required by the Company, rather than being in the hands of Goldman Sachs regarding equity, 333 Capital regarding debt, or M+W Group with respect to a trade sale. Mr Mentha advised that given the exposure held by the insurance bonding providers, they were the natural parties to bring into the equation. The proposal would see surety bond providers placed into a club banking facility to sit pari passu with the Bank, and allow the Bank to free up additional funds. It was noted that it would be the Company's obligation however to satisfy the bond providers of the Bank's proposal, and that the mechanism for the proposal was uncertain at this point. Mr Mentha also noted that bonds could be issued to replace bank guarantees in some instances and it could be achieved simply and quickly. Mr Mentha advised that he was hopeful of a solid position by close of business on 27 November 2013, given the Bank had already been working behind the scenes and that the proposal was consequently already well advanced in the ANZ Bank's credit approval process.

Mr Mentha advised that given the Bank was taking a risk by supporting the Company in the proposed fashion, especially given it was an equity style transaction that was rare for the Bank to undertake, it would be seeking penny warrants as a restructure fee. The proposal for the Bank to receive warrants had not yet been credit approved, however initial indications suggested that it would likely be acceptable to the Bank's credit department.

It was a condition of the offer from the Bank that, even though the proposal represented a "full fix" to the Company's liquidity problems, the Company pursue a transaction in the new year, such as an equity raising or trade sale, to bolster the Company's balance sheet and ultimately facilitate a mechanism for the Bank to divest its investment in the Company (on the basis that it was highly unusual for the Bank to hold an equity position in any of its clients).

In responding to a question from the Board as to what would happen if the surety providers did not support the proposal, Mr Mentha advised that a transaction with Anchorage would become paramount, and that he expected an indicative term sheet during the evening of 26 November 2013, subject to sign off by the Anchorage investment committee following its meeting on the morning of 27 November 2013. An Anchorage proposal would likely provide a bridging loan to the Company that would also require the Board to facilitate an equity raising or trade sale in the new year.

With respect to the Company's cashflow, the Bank's proposal would effectively cover the $13 million withheld payment under the Roy Hill Project until it was received by Samsung. Management would also seek an agreement from the Australian Taxation Office for the Company to defer some of its taxation obligations.

The Board noted that whilst the proposal from the Bank had not yet received credit approval, there was a high degree of confidence that the proposal would provide a suitable solution for the Company to continue trading. Mr de Kerloy advised that in addition to the Board's duty to ensure the Company remained solvent, it also had a duty to act at all times in the interests of all shareholders, and the Bank proposal certainly trumped the alternative of ceasing trading on the basis of solvency.

6. Section 560 of the Corporations Act 2001 (Cth) provides that if (a) a payment has been made by a company on account of wages; or on account of superannuation contributions (within the meaning of section 556); or (iii) in respect of leave of absence, or termination of employment, under an industrial instrument; and (b) the payment was made as a result of an advance of money by a person (whether before, on or after the relevant date) for the purpose of making the payment; then (c) the person by whom the money was advanced has the same rights under this Chapter as a creditor of the company; and (d) subject to paragraph (e), the person by whom the money was advanced has, in the winding up of the company, the same right of priority of payment in respect of the money so advanced and paid as the person who received the payment would have had if the payment had not been made; and (e) the right of priority conferred by paragraph (d) is not to exceed the amount by which the sum in respect of which the person who received the payment would have been entitled to priority in the winding up has been diminished by reason of the payment.

80. After the meetings, Bell received from Forge’s Statutory Reporting Manager, Ms Gabrielle Deane, a Forecast Tax Payment Summary which he forwarded to KordaMentha and Montgomery. It forecast that by the end of January 2014, Forge would owe the ATO $37,276,527.

81. That evening, Bell sent Montgomery an updated cashflow which contained a key assumption that all payments of PAYG and BAS [7] (GST + FBT) [8] between the week ending 29 November 2013 to the week ending 31 January 2014 totalling $29.6 million, would be deferred.

    7. Business Affairs Statement.

    8. General Sales Tax and Fringe Benefits Tax.

82. On that day, Bell resigned as Forge’s public officer. I do not consider that any relevant inference against Bell is to be drawn from this.

83. Throughout 27 November 2013, Simpson was involved in the preparation of a draft ASX announcement dealing with the proposed new ANZ facilities.

84. On 27 November 2013 at 1.38pm (Perth time), Bell provided a cashflow to Mr Glen Smith, Forge’s Company Secretary, with a copy to Montgomery. At 3.03pm (Perth time), Smith forwarded that cashflow to the board, including Simpson and Montgomery.

85. At 4.30pm, the board met. Simpson and Montgomery were present. Simpson advised the board that ANZ’s proposal had received credit approval within ANZ.

86. Simpson directed the release of the announcement to the ASX. Montgomery was at the meeting.

87. Montgomery tabled an updated cashflow, noting that it had been prepared on the basis that Forge would defer $30 million of taxation, and that within the next week or two management would draft, with the assistance of HSF, appropriate documentation to obtain approval for this deferral from the ATO.

88. The cashflow forecast cash shortfalls of $10.7 million with effect from the week ending 20 December 2013, and $3.3 million with effect from the week ending 17 January 2014. John noted that whilst there appeared to be a negative gap in the cashflow during the week ending 20 December 2013, this gap was capable of being filled should Forge proceed with ANZ’s proposal. Under the heading ‘Solvency Considerations’, the minutes record the following:

Mr John noted that whilst there appeared to be a negative gap in the cashflow forecast during the week ending 20 December 2013, this gap was capable of being filled should the Company proceed with the Bank's proposal to restructure its existing banking facilities. Management noted that it was reasonable to suggest that the ATO would agree to the Company's proposed deferral of taxation and a payment plan over the next 18-24 months, and that this position was communicated to management by Mr Konrad de Kerloy of Herbert Smith Freehills, and based on advice from Mr Mark Mentha of Korda Mentha. Management confirmed that the conditions precedent to the Bank's proposal would not impose an onerous position on management of the Company, and that it could provide all information required by the Bank. In that respect, Mr John advised that the Company's case was effectively a cashflow shortage, and much less of an insolvency risk. Following confirmation from management that, based on previous cashflow forecasts, the return of the required cash amounts into the cashflow forecast would be achievable, Mr John noted that the Board could form the view that there was a reasonable basis that the Company would remain solvent.

89. The cashflow included as a key assumption, [9] the deferral of taxation totalling $29.6 million between 29 November 2013 and 31 January 2014.

    9. Assumption (m).

90. The board was informed that Anchorage had provided a very preliminary proposal, but that KordaMentha, who were reviewing the proposal, had advised that some terms would be highly unacceptable to the board.

91. A draft ASX announcement was tabled. The board agreed that the final announcement would contain all matters not currently known to the market and would therefore be an effective ‘cleansing’ statement.

92. On 27 November 2013, Simpson and ANZ signed a Facility Letter, [10] the effect of which was that the facility of $11 million (known as Facility D) was increased to $20 million. Additionally, ANZ agreed to make available a further and new overdraft facility of $40 million (Facility E) of which $10 million would be a sub-facility for six months, and of which $30 million would be made available as a 12 month sub-facility progressively in the amount of the face value of ‘Contingent Instruments’ (meaning, in effect, bank guarantees) nominated by the ANZ as and when they were returned to or cancelled by it, or were fully collateralised and supported by way of ‘back to back’ contingent instruments. [11]

    10. Coulson sent a copy of this to Wright on 3 December 2013.

    11. Clause 4.2(h)(ii).

93. Under the Facility Letter ANZ agreed to waive certain events of default on conditions including that the increase in Facility D and the new overdraft facility could be provided in ANZ’s absolute discretion by way of a loan facility pursuant to s 560.

94. On 28 November 2013, Forge made a market announcement. Its introductory heading is:

Forge Group Ltd provides trading and financial update and

requests end to voluntary suspension

95. In the introductory section, it announces that:

•   Australia and New Zealand Banking Group Limited (“ANZ”) has agreed to provide further support to Forge Group through new facilities and certain amendments to existing debt facilities (“ANZ Debt Facilities Amendments”)

•   The ANZ Debt Facilities Amendments will provide sufficient facilities to cover the liquidity challenges and strengthen Forge Group’s balance sheet

96. The announcement contains the following section:

Update on Liquidity

At the end of October 2013, Forge Group’s cash balance was approximately $44 million (excluding restricted cash), and its net debt was approximately $25 million. As a result of the net cash outlay required to complete the DPS and WAPS projects, near-term working capital requirements and the current market conditions, Forge Group was facing a challenging liquidity position in early December 2013.

Since entering a trading halt on 4 November 2013, the Board has explored a range of options, including a potential capital raising and alternative funding arrangements, to secure additional liquidity and strengthen Forge Group’s balance sheet. In particular, the Board was focussed on delivering an outcome which could be executed in a short time frame in order to secure Forge Group’s order book and enhance its ability to win new work.

Forge Group’s existing financier, ANZ has agreed to the ANZ Debt Facilities Amendments. These amendments include:

•   Formal waiver to exclude the impact of various covenants in relation to Forge Group’s existing banking facilities which remain in place

•   Exclusion of the impact of the profit writedowns in certain covenant calculations

•   An increase in the working capital facility, resulting in an increase to the total working capital facility size from $11 million to $60 million, with $30 million available immediately and the balance available progressively as performance guarantees are returned or cancelled

•   The issue of warrants on the terms set out in Annexure A

•   Deferral of quarterly principal repayments of an existing acquisition facility of $3.3 million per quarter for the next three quarters

The ANZ Debt Facilities Amendments will solve the liquidity issues and strengthen Forge Group’s balance sheet.

Mr Simpson added: “The overall funding support gives Forge Group the financial flexibility to continue to trade on a business as usual basis and deliver on our current work in hand. Additionally, it underpins our future growth and tendering prospects.”

…

For further information, please contact:

David Simpson   Donald Montgomery

Managing Director   Chief Financial Officer

& Chief Executive

Officer

[phone]   [phone]

Investor enquiries:

Forge Group Investor Relations

[phone]

[email protected]

Media enquiries to Blake Wilshaw ([phone] or [phone])

97. After the announcement, Forge’s share price plummeted.

The 2 December cashflow

98. Mr Jonathan Malone of Price Waterhouse Coopers (PWC) was Forge’s tax adviser. On 29 November 2013, Malone made contact with the ATO, on a no names basis, with a view to initiating discussions with the ATO about the extension of payment terms. Montgomery was made aware of this contact.

99. On 29 November 2013, Bell sent a cashflow for the ten weeks ending 31 January 2014 to Coulson. It contained as a key assumption the deferral of tax totalling $29.6 million between 22 November 2013 and 31 January 2014. [12] This version of the cashflow was not given to Assetinsure or QBE.

    12. Without this deferral, the cashflow would have been negative, amongst others, for the weeks ending 13 and 20 December 2013.

100. On 2 December 2013, Bell sent an email to KordaMentha attaching a cashflow dated 27 November 2013 with the deferral of taxation as a stated assumption. Cashflows with this assumption were also sent to Montgomery and Simpson and to the board. It showed a cash deficit of -$0.8 million as at 20 December 2013.

101. However, on 2 December 2013, a different cashflow, omitting the tax deferral assumption, was sent by Bell to Coulson who sent it on to Sim. [13] During the proceedings, the parties referred to this cashflow as the 2 December 2013 cashflow.

     13. It seems clear that the tax deferral assumption is still made, but not stated.

102. The 2 December 2013 cashflow projected a shortfall in total funds available of $0.8 million in the week ending 20 December 2013 and $3 million in the week ending 21 February 2014. It showed cash surpluses to meet obligations on a weekly basis from 15 November 2013 to 4 April 2014 and that Forge would have access to an additional $19 million of funding from ANZ by way of overdraft facility with immediate effect from the week ending 29 November 2013.

103. The 2 December 2013 cashflow was emailed by Coulson to Sim on 5 December 2013.

The 3 December Assetinsure meeting

104. On 3 December 2013, Gorman and Calvert, who had flown to Perth, met with Montgomery and Bell. Coulson and Gardiner were present. By all accounts Montgomery did most of the talking and Bell said little, if anything. Coulson spoke intermittently.

105. Gorman’s account of the discussion is as follows:

Montgomery:   We've investigated to understand exactly what went wrong with DPS and WAPS. These are both significant projects, with DPS being a $43 million project. DPS was tendered for prior to our acquisition of CTEC in 2012. West Angeles is a $280 million project which will be moving into commissioning phase from February or March 2014. The problem with DPS was the acquisition of one of the boilers by Siemens that needed to be reworked so that it was fit for purpose. Both projects have been damaged by poor management practices by the project managers. Management received their earn outs prior to completion of those projects. We are undertaking further forensic work to determine what went wrong. We have engaged Graham White to undertake an independent analysis.

Calvert:   Does this mean that there will be problems with other projects?

Montgomery:   There are no other projects with material issues. A number of power division executives have been terminated, including the CEO and CFO.

KordaMentha are vetting our cash flows on a daily basis. We will provide to you a weekly cash flow forecast out until the end of March / April 2014, through Mark Coulson.

Cashflow will be tight over the coming weeks and then be positive from January 2014. $30 million is available from the ANZ from 6 December 2013, which is sufficient to meet our needs. An additional $30 million may or may not be required or made available depending on the return of bonds.

We are looking to enter into an arrangement with the ATO.

David Simpson has also met with Duro Felguera. The recent announcement did not cause a default and the contract will move ahead as planned.

The plan to restore the balance sheet is through strong profits for future projects.

Calvert:   What about the equity raising?

Montgomery:   There is no equity raising proposed at this stage. We have some large bonding requirements in respect of Roy Hill in January 2014.

Gorman:   Who are you looking at for those bonds? Which providers?

Montgomery:   Well other than AI, we have facilities with QBE, Chubb and AIG. We are talking to each bond provider. These bonds are expected to be issued by the end of January 2014.

Gardiner:   From the bank's perspective, AI's continued support for Forge is important. We're all in this together. A second ranking security position may be available for new debt which is advanced to support Roy Hill.

Calvert:   We need access to full information and we need to meet with David Simpson.

Coulson or Montgomery:    No problem. We'll give you access to information including the financials and arrange a meeting with David Simpson in Sydney before Christmas.

106. Calvert’s account is as follows:

Coulson:   Well, let's get started. Monty do you want to begin?

Montgomery: Yes ok. Well, firstly, DPS and WAPS were poorly managed. We inherited the underlying difficulties associated with those two projects when we acquired them from CTEC.

There was a project manager in there who was failing to give accurate progress update reports.

We've undertaken a thorough investigation and identified all potential risks on those projects and we are confident that $127 million is the total loss. There are no other projects affected at this stage and there won't be any further losses on DPS and WAPS.

We have engaged Graham White to undertake an independent analysis of the situation.

Calvert:   Will there be problems with other projects?

Montgomery:   We've quarantined the losses and undertaking forensic work on other projects. None appear to be affected at this stage.

Calvert:   What is the position of the Banks?

Montgomery:   ANZ continue to be fully supportive of Forge. They've appointed KordaMentha as IA to review systems and accounting processes generally, and they are vetting cash flows.

Gardiner:   That's right, we are supportive of Forge. They have identified the issues and we're all in this together.

Calvert:   I would like access to the reports KordaMentha is giving to the Bank.

Coulson:   Ok yes that can be arranged.

Gardiner:   Yes. We could agree to that on a non-reliance basis.

Gorman:   So what does your balance sheet and cash flow look like? We need to see updated financials.

Montgomery:   We've got a strong balance sheet and a full order book.

Cash flow will be tight for the next month or so but with the ANZ's debt support we will be fine. ANZ is going to advance a $30 million overdraft for working capital to get us through this patch. Plus there is an additional $30 million available as bonds on projects are returned if we need it. That debt funding patches the hole. There is no problem now with liquidity.

We're proposing doing the capital raising in due course but not right now. Goldman Sachs were not up to speed, they were incompetent and not west coast based, so did not understand our market. We've got a new firm, Euroz, to do a capital raising in due course but not now.

Roy Hill is a massive contract. It will generate significant cash flow during the 2014 financial year. With ANZ's debt funding we can get through the $45 million loss and within the next six months expect to see massive cash flow surplus. With Roy Hill, we have a large bonding requirement coming up in January. It will be about $80 million. More immediately though we require an advance payment bond of $6 million by end of December.

Calvert:   Who are you asking to issue those bonds?

Montgomery:   Other than AI, we have facilities with QBE, Chubb and AIG. We are talking to everyone.

Calvert:   Well we will need to see up to date financials - balance sheet, profit and loss, cash flows, work-in-progress - at a minimum - so that we can properly consider what we do going forward. That is in addition to the KordaMentha reports.

Montgomery:   Ok no problem.

Coulson:   Yes, that's fine. I'll send it to you in a pack.

Gorman:   I think we will need to meet again after we have the chance to review and consider that information.

Montgomery:   Yes, that is fine. We will be in Sydney in the next week or so for other meetings so we can arrange a time.

107. Montgomery did not give evidence.

108. Gorman made notes during the meeting and prepared a written diary note after it. The diary note includes the following:

●   Cash flow forecasts-what key assumptions have been made (project by project, overheads, capex, etc.)?

○   Cash flows vetted daily by KordaMentha.

○   Additional $30m facility to be made available by ANZ, another $30m (dependent on return of bonds) may be required / made available.

○   Cash flow will be very tight over coming weeks and then be positive from January 2014.

○   Looking to enter an arrangement with ATO.

The 4 December 2013 cashflow

109. At all material times, Mr Greg Brereton was Head of Global Risk Management for Credit and Surety at QBE. He was responsible for leading and managing QBE’s Global Risk Management team in relation to its Credit and Surety business. He left QBE in July 2015.

110. On 3 December 2013, Bell emailed Coulson a 2014 forecast profit and loss statement, balance sheet and a cashflow (in a more detailed form than the usual cashflow) covering the period October 2013 to June 2014. This form of cashflow was sent by Coulson to QBE on 3 December 2013 and to Assetinsure (Sim) on 4 December 2013. [14] Sim sent it on to Calvert and Gorman. During the proceedings the parties described this cashflow as the 4 December 2013 cashflow. It was reviewed by Brereton.

     14. After receiving this, Sim called Coulson and asked for the assumptions behind it. On 5 December 2013, Coulson forwarded the 2 December 2013 cashflow which Bell had sent him. Sim forwarded this to Calvert and Gorman, who reviewed it.

111. The 4 December 2013 cashflow forecast positive ‘headroom’ from October 2013 to June 2014 taking into account $30 million to be obtained from the ANZ facility. As at January 2014, total group headroom on this basis is shown as $28.59 million. It makes no reference to deferral of tax payments.

112. Shortly after Sim received the 4 December 2013 cashflow, he phoned Coulson and requested to be given the assumptions behind it.

113. There are in evidence, various other cashflows prepared around this time (known, the evidence shows, to Bell and in some cases Montgomery) which broadly show the same result as at the end of January 2014. However, these seem invariably to identify the deferral of taxation payments as a key assumption. It seems clear that the detailed version has this assumption, but it is not stated.

114. There is in evidence an exchange of emails between Montgomery and Bell on 4 December 2013 which reveals their understanding that access to the additional $30 million component of the ANZ facilities was dependent on the conversion of bank guarantees issued by ANZ in connection with DPS to surety bonds.

115. As is mentioned earlier, the 2 December 2013 cashflow was sent by Coulson to Sim on 5 December 2013.

The 6 December 2013 QBE meeting

116. Brereton wished to discuss Forge’s position directly with Forge representatives.

117. On 6 December 2013, he and a number of other QBE personnel, including Wright, met Simpson, Montgomery and Bell in Perth. Coulson was present, as were representatives of ANZ and KordaMentha. This was the first time Brereton met with Forge executives and Coulson. Simpson did most of the talking. According to Brereton, the conversation was to the following effect:

Brereton:    You will appreciate we are concerned about the recent events. We would like to know how your business is tracking in the light of the DPS and WAPS write-downs and what steps have been put in place to ensure these issues do not arise again.

Simpson:    The main problem with the DPS and WAPS projects was a system error, which we did not identify earlier. Both the DPS and WAPS projects were acquired when we bought the old CTEC business (now Forge Power) in 2012, and Forge had ventured into areas of work that were not managed as well as they could have been. Management practices have been put in place to resolve the issues so they will not happen again. We have acted very cautiously to protect all parties.

Brereton:    Are there any further steps you are looking to take to address liquidity issues?

Simpson:   We ran with three options, being equity, debt and trade. Our plan A was to look at raising equity via a low doc raise but ASIC did not approve that. We are also still looking to undertake an equity raising. The process is on-going and we are reasonably confident we will be able to progress. We are having daily update calls with our merchant bankers and we would be happy for you to join those discussions if that would help. In the meantime, we had approached the bank to increase our existing facility.

Brereton:   Tell us about the ANZ debt arrangements? Is the new facility from ANZ enough to resolve the liquidity and cash flow situation? We also need to understand how much support ANZ is going to give you.

Simpson:   We have secured additional debt funding from the ANZ that have us covered. ANZ was not our last option by any means but ensures less dilution to our shareholders. ANZ have increased the facility by $49 million to $60 million to accommodate funding to complete the problem projects. So our working capital has increased from $11 million to $60 million. $30 million of the new monies are available immediately with the additional $30 million to be progressively available as bank guarantees are returned. The new ANZ facilities are more than enough to cover cashflow requirements and all contingencies and to fix any liquidity problems. We know liquidity and cash-flow is going to be tight compared to what we have previously experienced. The Roy Hill project is starting soon and this is key to our long-term growth. We are and will remain cash positive. Our representatives are meeting with ANZ on a daily basis and as you know, KordaMentha have been engaged by ANZ to conduct a review of the business.

We would like QBE to issue the surety bonds required under the Roy Hill contract along with Assetinsure. ANZ is open to discussing whether QBE and Assetinsure might be able to take security in respect of those new Roy Hill bonds on a pari passu basis.

Brereton:   Any increases will need credit committee approval and there will be a lot of work to do in order to get any approval over the line.

Simpson:    I understand that.

Brereton:   It would be helpful if you contact trade credit providers in the market who support you about the trade credit exposure they carry on your behalf. It would be beneficial if a dialogue was opened with them as they enable your suppliers to trade with you. We would then like to be free to contact them.

Simpson:    There is no problem with that - I will do so.

Brereton:    To assess further bonding requirements we need updated financial information from you on a regular basis.

Simpson:    I understand.

Brereton:   It would be helpful if we could see the reports that KordaMentha are providing to ANZ. Can we please be provided with those?

Gardiner:   I'm sure that we can arrange that.

Langdon:   We are happy for our reports to be shared with QBE so long as ANZ and Forge are OK with that and so long as it is understood that QBE can't rely on the reports and they will be provided for information only.

Rankin:   Subject to David's views, we also have no problem with QBE contacting us directly to discuss any concerns.

Simpson:   That is fine with me.

Rankin:   Please do then give us a call if there are any concerns going forward.

Brereton:   In my experience, these announcements tend to come in threes. Is there any further disclosure that Forge has not as yet made, or that Forge wants to tell us that is not already in the public space?

Simpson:    No, there is nothing more to disclose. We have disclosed and announced everything.

118. Wright made a handwritten note of the meeting, which contains the following recording:

ANZ believe that the facilities are more than enough to cover all contingencies.

119. Brereton was cross-examined at length. He had a comprehensive grasp of all aspects of the matter. He was careful and considered, albeit a trifle longwinded. By the time of the hearing he no longer worked for QBE. Simpson did not give evidence.

120. On 6 December 2013, Malone sent a letter to the ATO seeking a further period of time to make a full submission to the ATO concerning tax deferral, given that in his discussions with the ATO to date, the ATO had asked for Forge to provide a response by 9 December 2013.

121. On 9 December 2013, Ripp of PWC (who seems to have reported to Malone) followed up the ATO to seek a response to the 6 December 2013 letter that Malone had prepared and sent. The ATO informed Malone that it had received the letter and the relevant team within the ATO would be briefed on the issue and that ‘no information is required today’. Ripp updated Forge as to the position.

122. On 9 December 2013, Sim emailed Coulson raising a number of queries, including with respect to the shortfall of $800,000 shown in the 2 December 2013 cashflow for the week ending 20 December 2013. Coulson responded stating ‘I’ll get the latest cashflow for you this morning along with the Roy Hill info’.

123. On 9 December 2013, Bell provided a cashflow dated 6 December 2013 to Coulson. That cashflow included the assumption of deferral of taxation payments. It showed a cash flow deficit of $1.6 million in the week ending 20 December 2013.

124. Coulson responded: ‘This one is worse! Can you give me a smoothed out [15] one wit (sic) appropriate commentary on the bottom?’

     15. Smoothed out appears to be a euphemism for adjustments which will eliminate deficits.

125. On 10 December 2013, Sim emailed Coulson repeating his request for information which addressed the cash flow deficit in the 2 December 2013 cashflow.

The 12 December Assetinsure meeting

126. Wedgwood wanted to meet with the Forge executives to obtain an update on Forge’s financial position directly from Simpson and Montgomery.

127. On 12 December 2013, Wedgwood, Gorman, Calvert and Sim met with Simpson, Montgomery and Coulson. Simpson did most of the talking. Montgomery hardly spoke.

128. Wedgwood’s account of the conversation is as follows:

Wedgwood:    I want to hear what the position is at Forge.

Simpson:    As a company, we have had a big shock. The post audit accounts had uncovered $127 million in cost overruns relating to two CTEC projects. The problem was the management of CTEC. The past owners who sold CTEC to us had colluded and not brought the cost overrun to our attention. We were unaware of the cost overruns on the projects. The previous management held back those figures from us. The costs were hidden by the previous owners. As a result of the revelations, we have fired the relevant management staff. We knew nothing about this when we acquired CTEC.

Wedgwood:   What about the previous shareholder? Can you take action against them?

Simpson:   The previous owner has already been paid his earn out however we are considering all options.

Wedgwood:    What is your financial position?

Simpson:    KordaMentha and 333 have been brought in by ANZ to do a thorough review of Forge and to fully understand the impact of the cost overrun situation. That review has now been completed. We are now satisfied that $127 million is all we need to meet cost overruns. ANZ will provide a working capital facility to meet the cost overruns and allow Forge to keep trading.

Wedgwood:    But how confident are you that the cost overruns are limited to $127 million?

Simpson:    We have been over it ourselves and with KordaMentha with a fine tooth comb and we are all absolutely confident that $127 million is the total provision required for cost overruns on those two projects. There are no other holes and our problems are confined to those two projects. There are no more issues. We can take this hit, it’s a one off event.

Wedgwood:    Give us all the facts. We want to ensure there are no more surprises.

Simpson:    There will be no more surprises. We now have the situation under control.

Wedgwood:    What is the position with ANZ and their support?

Simpson:    ANZ have provided a new working capital facility and are one hundred precent supportive of Forge. That facility covers all funding that we need. It has solved any liquidity problems and is a complete fix.

The reality is that the acquisition of CTEC was a disaster. Our main business is construction. Moving into Power was a big mistake. However, it was not a mistake I am responsible for. The move was not on my watch. The previous management made a bad decision.

We have a very strong order book. And we now need bonds for Roy Hill from QBE and Assetinsure. We are looking for $45 million from each of you, which is due in January 2014. We also have an immediate requirement for an advance payment bond of $6 million which is required by 19 December 2013. The Roy Hill contract is critically important to Forge - given it is worth over $800 million and will sustain the business over the next 2 to 3 years. The cash flow from Roy Hill will start coming in next year and will return us to strong profitability. If we don’t deliver the required bonds to Samsung under the Roy Hill contract by their due dates, then Forge will lose the contract and its future will be in doubt.

The larger bonds of $45 million must be delivered by January 2014 under the Roy Hill contract, but we need approval for those bonds prior to Christmas.

129. As with the other witnesses, I have no reason to believe that Wedgwood gave anything but an honest recollection. He was restrained in his responses under cross-examination. He made concessions where appropriate. He clearly had a good grasp of the relevant issues.

130. Sim’s account of the conversation is as follows:

Wedgwood:   The purpose of the meeting is to discuss the trading halt and the Roy Hill bond requirements. I want to hear what the position is at Forge.

Simpson:    Thanks for meeting with us. Let me talk you through the position. The write downs have been a terrible surprise.

The problems are with CTEC. The previous management caused the issues. We only realised there was a problem at the end of September 2013. CTEC management did not disclose any problems with DPS or WAPS. We have worked through the full costs to complete the projects and conducted our analysis. The projects are approximately 80 to 90% complete.

We have worked out the total costs and that led to the recent profit downgrade. Now we know the costs we are setting about fixing the problem. We have addressed all issues. We have put in place steps to ensure this doesn’t happen again. We have had to have significant management changes. The management responsible have been sacked. The COO of CTEC has gone and we are now confident that the project is under control. The problems were caused by management incompetence or maybe fraud. We have Freehills investigating. We may take action. So the hole is limited to a profit write down of $127 million and we have additional costs of $45 million in order to complete the projects.

The problems are confined to the power division. There'll be no further losses. There is nothing more to disclose beyond what we said in our market announcement. There will be no more surprises.

131. Gorman’s account of the conversation is as follows:

Simpson:   I want to be fully transparent here.

We inherited a number of contracts when we bought CTEC. The average size of the contracts was $40 million but WAPS and DPS are as much as $600 million combined. The project was showing full profit and early delivery.

The losses on DPS and WAPS were unexpected and came as a big shock and surprise.

There were large variations from the electrical and mechanical aspects of the projects. This is not normal for this stage of a project.

A full 'cost to complete' reassessment was done. I went and saw the principals. The problems with the contracts were that there was no contingency built in. Forge's previous management failed to disclose the problems with the projects. At tender time, CTEC didn't properly allow for design, engineering variations and there was no contingency built in. The due diligence was done by a predecessor. As a result of the problems a new tender process has been introduced by Forge so it doesn't happen again. Two new project managers have been brought in to complete the project and the previous project managers have been terminated.

We have been through everything. We have done a thorough and independent review. Forge has booked all the costs but not the upside. So the position will only improve. There will be no more surprises.

Forge's projects represent only 16% of the current order book.

After our investigation we have determined that there will be a $12 million write down, $50 million of which relates to last year.

ANZ is providing a short term working capital facility for the next 3 months, which is a complete fix for our cash flow position and enables us to deliver other works.

An equity raising is planned for the first quarter of 2014.

ANZ have been supportive. A lot of work has been undertaken by ANZ on the forward order book.

132. Calvert’s account of the conversation is as follows:

Calvert:   Thank you for meeting with us.

As you know, we wanted the opportunity to speak with you again, following our 3 December meeting, to get an update from you as to Forge's position generally, the two problem projects and get further comfort around what measures have been put in place to contain the losses, and how the business is tracking going forward.

You will appreciate that it is important that we get that comfort from you as part of our decision making process as to Forge's further bonding requirement for Roy Hill.

Peter wasn't at the last meeting and I know that he, in particular, wanted to meet with you to ask particular questions he has, so I might hand over to him in the first instance.

Wedgwood:   David - I'll address this to you if you don't mind. You've announced these losses on DPS and WAPS. How can you be confident that there will be no further losses?

Simpson:   Well, Peter, can I firstly say that the losses on DPS and WAPS came as a huge surprise to us.

We've gone through the contracts and we've done a lot of work to identify the cause of the problems. We've done an internal review of our reporting systems and processes and appointed an expert to undertake that review.

There were a few underlying causes as to what went wrong on the DPS and WAPS projects. Firstly, there were design changes required by Siemens but the contracts did not allow for variations. Secondly, the management guys in the power division hadn't been properly reporting problems on the projects so we weren't aware of the issues until now. We've now terminated those particular persons.

ANZ also engaged KordaMentha to review all of our projects, including our reporting procedures and the review came out "cleanly" and revealed no issues around Forge's procedures or governance.

So when all is said and done, having now thoroughly investigated everything, we are entirely confident that there will be no further write downs in relation to these two projects and that there are no other affected projects. We have fully provisioned for the losses as per the announcement to the market on 28 November and that provisioning is final.

Wedgwood:   Ok. But how do the losses affect the business? Where is the business heading? What's the state of the balance sheet and cash flow?

Simpson:   Well as a consequence of the losses on DPS and WAPS we're now in a tighter cash flow position as we have to cover the $45 million cash outlay. But it is just for the next month, and it will be manageable because ANZ has agreed to provide a further line of credit of $30 million which will see us through. The ANZ debt funding is enough to cover us and complete our work and secure new work. The ANZ is a complete fix to our cash flow requirements.

We're also looking at longer term options for a capital raising to generally strengthen the balance sheet.

Calvert:   So you'll be able to trade through this?

Simpson:    Yes absolutely we will. We have been through everything with a fine tooth comb. We've reviewed DPS and WAPS, and they are under control and we've contained those losses; the ANZ is fully supportive and the debt funding is sufficient to cover our cash needs; we've got Roy Hill and a full order book. It's business as usual.

Calvert:   Do you know Samsung's bonding requirements yet on Roy Hill?

Simpson:   Yes, it will be in the order of about $83 million and we expect they will be required in January.

Calvert:   Ok, well we'll continue to review our position.

The 12 December 2013 cashflow

133. On 13 December 2013, Sim emailed Coulson indicating that Assetinsure’s submission to Swiss Re was being finalised, and asking for a cashflow to 30 April 2014, as had been requested at the meeting on 12 December 2013.

134. Coulson sent that request to Bell who then sent an email to Coulson attaching a cashflow dated 12 December 2013, stating that appropriate assumptions have been shown in the cashflow for assistance to readers.

135. The 12 December cashflow projected a shortfall in total funds of $0.7 million in the week ending 21 February 2014, but otherwise provided for weekly cash surpluses from 15 November 2013 until the week ending 4 April 2014, assumed a deferral of Forge’s taxation liabilities (but did not state it as an assumption), and indicated that Forge would have access to an additional $19 million of funding from ANZ.

136. Coulson forwarded the 12 December 2013 cashflow to Sim and to Wright.

137. The 12 December 2013 cashflow was considered by Brereton, Calvert, Gorman and Mr Pius Leupi who was at all material times Swiss Re’s Senior Underwriter for Credit and Surety in Zurich, Switzerland.

138. At around the same time, Bell provided KordaMentha and the board with versions of cashflows which contained the stated assumption of deferral of taxation payments.

The Swiss Re Risk Underwriting submission – 13 December 2013

139. Following the 12 December 2013 meeting, Calvert and Gorman sent a memorandum to Leupi describing its subject as Forge Planned Strategy. The memorandum said of the Roy Hill Contract that they have a good margin and would allow Forge to recover from the write-offs against the DPS and WAPS contracts. The memorandum said that if bonds were not made available, Forge would forfeit these contracts with the probable outcome that ANZ could withdraw future support. The first proposal mooted was that Swiss Re and QBE share the issue of the bonds in equal proportion i.e. $46 million each. The memorandum was also signed by Sim and Wedgwood.

140. Sim then prepared a comprehensive Risk Underwriting submission dated 13 December 2016 for Swiss Re. It recommended Swiss Re's approval to maintain the Forge facility limit at $100 million and in addition:

1. issue a $6 million advance payment bond as requested by Forge in favour of Samsung under the Roy Hill Contract by 16 December 2013;

2. split with QBE, on a 50/50 basis, Forge's requirement for approximately $97 million in bonding lines under the Roy Hill Contract, being approximately $48.5 million each, with both bond providers to be secured on a pari passu basis with ANZ's security.

141. Under the heading ‘Security’, the submission stated:

From the 3rd July 2013, a first-ranking GSA [16] was granted to ANZ to support its new acquisition facilities. Since the restructure, it is proposed that AI will rank pari-passu with ANZ and the other bonding providers for any new (increased) lending, for what are essentially unsecured contingent exposures.

Although it is likely that little will remain for the bonding providers in a wind-up scenario, this security concession from ANZ underlines the importance (to both Forge and ANZ) of continued support from the existing bond providers, particularly in providing the new bonds required for the Roy Hill project.

16. General Security Arrangement.

142. The 13 December 2013 submission stated that ‘ANZ has solved the Group’s immediate liquidity needs by increasing its working capital facility’.

143. At the time, Forge’s facility limit with Swiss Re was $100 million, of which it had drawn $70.587 million. The submission recorded that the substantial balance sheet backing which underpinned Swiss Re’s prior unsecured position, no longer existed and that Swiss Re was now reliant for comfort on their view of Forge’s WIP/order book, in particular, the Roy Hill Contract to stabilise the company by rebuilding the capital base via retained earnings along with a further equity injection.

144. Under the heading ‘Cashflow’, the submission stated the following:

A monthly cashflow forecast for FY14 has been provided, in addition to a weekly cashflow covering the period until 3rd April 2014 (including assumptions). Forecasts were prepared in the conservative manner possible (sic), with all costings included and no revenue claw-backs (such as those due from Siemens on the DPS project) included from the various subcontractors are factored into the revenue projections. Cashflows are vetted daily by KordaMentha.

As evidenced from the weekly cashflow provided for Forge Group, net cash position remains very tight during Dec-2013 / Jan-2014, with some week-to-week volatility apparent until the end of Jan-2014. Position will be supported by ANZ’s $30m overdraft facility, which is now available (commenced 6th December 2013). An unfunded cashflow deficit of $0.8m (assuming full overdraft utilisation) exists for the week ending 20th December 2013, although the client has advised some flex remains around payments in the weeks either side, and an excess position will not be required. The client is also looking at entering a payment arrangement with the ATO, in order to smooth out any statutory payment obligations.

145. The submission was signed by Wedgwood, Gorman, Calvert and Sim.

146. On 13 December 2013, Sim sent the submission to Leupi and Calvert.

147. Between 14 December 2013 and 18 December 2013, there were email communications between Leupi on the one hand and Sim and Calvert on the other in which Leupi asked for and was provided with additional information.

148. Leupi informed Calvert that the issue of the $6 million bond was within the automatic delegated authority of Assetinsure.

149. On 19 December 2013, Swiss Re issued the $6 million bond in favour of Samsung.

150. On 20 December 2013, Sim emailed Leupi requesting Swiss Re's approval to increase Forge's bonding facility limit with Assetinsure from $103 million to $119 million to accommodate the issue of bonds in the sum of $41,497,500.

151. On 23 December 2013, Calvert emailed Leupi requesting that Swiss Re provide approval to increase Forge's bonding facility limit with Assetinsure from $103 million to $119 million.

152. On 23 December 2013, Leupi emailed Calvert stating that Swiss Re would ensure that there would be capacity to issue the bonds by mid-January 2014.

153. On 24 December 2013, Leupi made a decision to approve the submission and permit the issue of bonds on a shared basis with QBE. Leupi then referred the matter to Mr Adrian Kaerle, Swiss Re’s Managing Director, Head of Credit and Surety for a second approval, which was approved and received that day.

154. On 30 December 2013, Forge announced to the market that Samsung had provided formal notification to proceed with Phase 3 works for the Roy Hill Contract, and that the value of the contract attributable to Forge was approximately $830 million.

The Saturday evening 11 January 2014 conversation between Simpson and Brereton

601. This claim is not intelligibly pleaded. What is sought to be put does not correspond with what is pleaded. This is sufficient to reject it.

602. In any event, if it is intended to be a reprise of the contention that Forge was insolvent because it was not on track or likely that the additional ANZ funding would be available and that there would be a deferral arrangement with the ATO, I would reject it for the reasons set out above in relation to those matters.

The Monday evening 13 January 2014 conversation between Simpson and Brereton

603. Somewhat at odds with the restriction of this complaint to one of non-disclosure, the plaintiffs’ written outline argues that each of the statements made in the telephone conversation were representations as to existing facts but even if they were representations as to future matters, Simpson had no reasonable basis (having regard to the contemporaneous and objective evidence) for those statements.

604. This complaint is not made out.

605. I have already found that the ATO repayment plan was on track or likely and that the bonds were always going to be issued before the repayment plan was agreed. The plaintiffs have not established that Simpson saw the 8 January 2014 and 10 January 2014 cashflows. They were drafts. By the time of this conversation, they had been superseded by the 11 January 2014 cashflow. It may be accepted that the board was operating on the basis of a cashflow which had an assumption that the $30 million additional facility from ANZ was on track or likely. It is not open for the plaintiffs to argue that it was not on track or likely because of the improbability of the bond swap. However, they have in any event not established that it was not on track or likely.

606. Earlier in the day (10:56am Perth time, 1:56pm Sydney time), Brereton had emailed Simpson that he expected to hear that the board had voted to lift the trading halt. The email stated that on the basis that the Forge board, ANZ, Swiss Re and QBE were in lockstep, they would then be able to direct the issue of the January bonds.

607. Importantly, when Simpson called Brereton later that evening, he was fulfilling Brereton’s expectation.

608. Brereton already knew that the ANZ were supportive and he was being provided with the information he asked for. All the relevant players were in lockstep.

609. I do not consider that there was any reasonable expectation that Simpson would say the additional matters the subject of this complaint.

The 13 January 2014 draft ASX announcement

610. The non-disclosures argued by the plaintiffs in this complaint are the same as those pleaded with respect to the 13 January 2014 telephone conversation. For the reasons set out with respect to that complaint, this complaint is also not made out.

611. It is not made out for the additional reason that I uphold Simpson’s submission that the non-disclosure was not his personally.

612. It is not necessary to consider whether the matters the subject of the alleged non-disclosure fall within the exceptions to ASX listing rules. [85] This is not a charge of breach of the listing rules.

     85. ASX Listing Rule 3.1A.1.

Causation and Damage – the $6 million bond and the January bonds

613. I have found that the plaintiffs have not established that any of Simpson, Montgomery and Bell engaged in conduct that was misleading or deceptive or likely to mislead or deceive. It is thus not necessary to consider whether the conduct complained of caused the plaintiffs any loss. However, I will nevertheless do so on the hypothesis that all of the conduct complained of had been made out.

614. The plaintiffs’ key propositions are that:

1. they were misled into approving the 13 December 2013 and 16 December 2013 submissions;

2. the conduct which caused Swiss Re to approve the 13 December 2013 submission induced it to issue the $6 million bond;

3. absent approval of both submissions, the January bonds would not have been issued;

4. it follows that if the conduct complained of with respect to the submissions is made out, the issue of the January bonds will have been sufficiently revealed to have been caused by that conduct;

5. the Court should in any event conclude that the defendants’ misleading conduct over the period 11 to 13 January 2014 caused the plaintiffs to issue the bonds.

615. Their case is that they suffered damage by the issue of the bonds. What role, if any, in bringing about that event did the conduct complained of play? A full evaluative assessment[86] of this requires:

1. examination of the factors that were significant to Swiss Re and QBE in their decision to issue;

2. examination of the significance, if any, to that decision of the matters the subject of the complaint;

3. assessment of the effect on the outcome of eliminating from consideration the matters the subject of the complaint.

86. Awad v Twin Creeks Properties Pty Ltd [2012] NSWCA 200 at [43]-[45].

Significant factors

616. It is apt to observe that the plaintiffs are substantial corporations and commercially highly sophistiacted. Their business is assessing and taking calculated risk. [87] Their operatives are knowledgeable, sophisticated and highly experienced with respect to their craft. [88] In making the judgments they made, they brought these qualities to bear. They were the recipients of significant and detailed financial information about Forge, little of which was good news. They brought their own judgment to bear on a large body of information.

     87. Leupi described Swiss Re as a risk taker – T713:L25, T727:L11.

     88. See Miller & Associates (2010) 241 CLR 357 at 384 [91].

617. The January bonds were issued notwithstanding:

• continually emerging bad news;

• knowledge of massive and successive write-downs; [89]

  89. There had been a deterioration in the estimate as to the extent of the further write-down from an initial $8-10 million on the morning of 10 January 2014 to $10-20 million by that evening to a range of $23-28 million on the evening of 13 January 2014.

• knowledge of default by Forge in its tax payment obligations without there being in place a binding deferment arrangement with the ATO;

• knowledge that Forge was cash strapped;

• knowledge that Forge was stretching its creditors;

• knowledge that Forge had been in a trading halt;

• knowledge that Forge’s earlier substantial balance sheet backing for unsecured creditors no longer existed;

• in the case of QBE, the significant reservations articulated by Van Heyst;

• concerns about the 11 January 2014 cashflow; and

• open scepticism as to the competence of Forge executives. [90]

  90. In an email on 13 January 2014, Sutherland wrote to Wright and Brereton of Montgomery: ‘has that genius CFO been counting again…’

618. The January bonds were issued despite and in the face of it being obvious (or perhaps because it was obvious) that without them Forge was dead.

619. I find that the critical matters which induced Swiss Re and QBE to act as they did are the following:

• they had a direct and vital commercial interest in Forge’s survival;

• they had a long client history with Forge;

• they had significant unsecured exposure to Forge which was expected to reduce substantially in the short term. Their option to issue or not to issue was stark. If they did not issue Forge was dead. If they did issue, Forge had a prospect of survival because of the lucrative Roy Hill Contract (which had a good margin over and above contingencies) and therefore a prospect that their unsecured exposure would be ‘managed’, that is reduced or eliminated, and the January bonds would ultimately be returned. Leupi saw the issue of the bonds as ‘the only way forward to protect all our interests’;

• Forge’s prospects of achieving a trade sale or raising more equity were enhanced;

• Forge had the continuing support of its bankers and both Swiss Re and QBE saw it as being in the bankers’ interests to keep Forge alive;

• the January bonds were secured;

• Swiss Re and QBE became, together with the ANZ, part of the Banking Club which gave them commercial leverage. The security arrangements would prevent any one of Swiss Re, QBE or ANZ from tipping Forge into an insolvency regime;

• Swiss Re and QBE were, and knew they were, acting in lockstep; and

• Forge had come out of its trading halt.

620. The plaintiffs’ central complaints are that they were misled as to the prospects of the additional $30 million ANZ funding and the deferral arrangement with the ATO, principally by being told that the ANZ funding solved Forge’s liquidity issues and being told by way of the 11 January 2014 cashflow that both the funding and the deferral arrangement were on track/likely.

621. The ANZ funding was of course only part of a solution if it was available.

622. The counterfactual to the making of a representation that something is on track or likely is not a representation or communication that it is not on track or is unlikely. It could be to convey nothing, to convey that it might be on track or that there is an even chance of it happening, or that there is a possible problem or timing issue. [91] The counterfactual to a non-disclosure is not necessarily the precise obverse of it.

     91. In accordance with the Key used in the cashflows.

623. Had the on track/likely assumption not been communicated, what assumption would have been? Had no assumption or some different assumption been communicated, what would the state of knowledge of Swiss Re and QBE have been? Would they have asked further questions? If so, what would the answers have been? The same questions arise with respect to the ANZ funding solving the liquidity issues. If nothing had been said, what would have happened? Swiss Re and QBE had a massive body of information at their disposal.

624. If the defendants had provided more information to the plaintiffs about the ATO dealings, including that security was required, the plaintiffs would likely have asked more questions. One might think that they would have been given more information, along the lines that they were ultimately in fact given, and after which they accepted the ATO’s position. If the counterfactual is to include disclosure of further information about the prospects of an ATO deal, it would have to include such further information as they would have been given.

625. Assuming – contrary to my earlier holding – that the plaintiffs were entitled to prosecute a case that a bond swap was unlikely, what would have been their state of knowledge had the defendants disclosed more information about the potential bond swap? It is likely, if not inevitable, that Swiss Re and QBE (particularly QBE since it was seen as a possible provider of the additional bonds) would have wanted to know more from the ANZ. It is likely, if not inevitable, that the defendants would have provided more information about support from the ANZ including as to the back-up plan should the DPS bond swap not be acceptable, which was referred to at the 11 January 2014 board meeting. If the counterfactual is to include the disclosure of further information about the prospects of the facility, it would also have to include, for example, the ANZ’s expressions of support. [92]

     92. This further demonstrates why the plaintiffs cannot in fairness be entitled to prosecute that case.

626. The plaintiffs’ case did not come to grips with these issues. It is not for the Court, of its own motion, to identify and then select the most likely counterfactual in these circumstances. This leaves aside the additional difficulties that would be caused if there had to be an assessment of what role each discreet complaint against each defendant had on the outcome.

627. On the footing that the defendants did not convey that the ANZ facility or the ATO arrangement was on track or likely, but said nothing, having regard to all the other information at the disposal of Swiss Re and QBE, it is difficult to see why the bonds would not have been issued anyway.

628. I should say that I am not at all satisfied, despite the evidence of the witnesses, that there was meaningful reliance specifically placed by Swiss Re or QBE on the on track/likely status given to the presently relevant assumptions in the 11 January 2014 cashflow. I do not accept the plaintiffs’ submission that any decision was influenced by it to a substantial degree or indeed to any meaningful degree.

629. Leupi, the principal decision maker with respect to the January bonds, decided to authorise the issue of the bonds before reviewing that cashflow. The evidence did not clearly establish that he saw it before the issue of the bonds. The first suggestion by Leupi that he read it on the morning of 13 January 2014 was led orally for the first time at the hearing. He did not recall receiving it at the time he swore his affidavit. It is not altogether clear that Calvert saw it either. He told Sim on Sunday afternoon that he had not read it on his iPhone because he was on the Central Coast and could not open it. Gorman did not review it because he was away and Sim did not obtain much comfort from it – he was not sure how ANZ/KM were comfortable. Amongst others, Brereton said of the ATO arrangement: ‘this is going to be tough’.

630. The specific conduct complained of in connection with the availability of the ANZ facility is entirely drowned out by the other information which Swiss Re and QBE had about the ANZ’s support.

631. Amongst others, Swiss Re and QBE knew that the ANZ and KordaMentha had reviewed the 11 January 2014 cashflow, and had attended the 13 January 2014 board meeting, and were comfortable with the statements made in the draft ASX announcement of 14 January 2014 which they had seen on the evening of 13 January 2014. The ANZ had extended its support for Forge through a combination of new facilities and amendments to existing facilities, resulting in an increase to the total working capital facility size from $11 million to $60 million with $30 million available immediately. Brereton spoke directly with Gardiner.

632. During the 10 January 2014 telephone conference, Gardiner said that ANZ was ‘taking a pragmatic view and would continue to support Forge’ and that it was awaiting additional information over the weekend. On 11 January 2014, Wright wrote to Coulson and Sim that the ANZ advised that they were still supportive. Brereton also emailed Simpson that QBE along with ANZ and Assetinsure were looking to ensure that they could assist in any way possible and Sim reported to Leupi that ANZ indicated in this conference that ‘they remain fully supportive’.

633. Shortly after 13 January 2014, Swiss Re and QBE agreed to the security which the ATO wanted. They did this even though there was some complaint that they had not been told before. This is particularly relevant to the evidence of Brereton who was not an unimpressive witness, but whose evidence I nevertheless do not accept with respect to how he says he would have acted differently.

634. The idea that the matters complained of with respect to the ANZ facility, looked at in their general factual context, could have had any real influence on Swiss Re and QBE, borders on the fanciful. The suggestion that they would have not proceeded had they been told about the security earlier also borders on the fanciful.

635. I reject the submission that were it to be established that the 13 December 2013 and 16 December 2013 submissions were induced by the conduct complained of, it follows that the January bonds were issued and loss suffered because of the same conduct.

636. Having regard to what occurred between the submissions and the final approval, the conduct complained of as having induced the approval of the submissions, was not causative of the final approval and the issue of the January bonds. In other words, the damage allegedly suffered by the plaintiffs in connection with the January bonds was not because of the conduct which induced the approval of the submissions.

637. It may be accepted that without the approvals the bonds would have not been issued. It does not follow that that which caused the approvals to be given caused the bonds to be issued.

638. Perhaps more importantly, Swiss Re and QBE were free at all times not to issue the bonds even though they had earlier approved the submissions. Based simply on their state of knowledge as at the date of the submissions, they would not have issued a further $80 million worth of bonds. They did that on the basis of what occurred subsequently.

The 19 December 2013 $6 million bond

639. There is something of a lacuna in the plaintiffs’ evidence as to who made the decision to issue this bond. Leupi made it clear that it was not his decision. He took the position that the $6 million bond was within the delegated authority of Assetinsure. The evidence does not disclose precisely who within Assetinsure made the decision to issue.

640. Swiss Re has fallen far short of establishing that the conduct complained of was causative of the issue of the bond. In context, the amount was modest but the consequences of refusal were great.

641. Given that Swiss Re were prepared to issue bonds for far greater amounts in January 2014, where the information at their disposal about Forge included material which placed Forge in a much more negative light, it is highly likely that Swiss Re would have issued this bond in any event.

Quantum and other questions

642. It is for the plaintiffs to prove that they suffered loss and its quantum.

643. They claim as their loss the amount they have paid out, less the premiums they received, less recoveries paid to them from Forge assets.

644. It is clear that the process of recovery in the winding up or receivership of Forge has not yet been completed and there is some possibility of further recoveries which may result in payments to Swiss Re and QBE.

645. The defendants argue that the value of the rights of indemnification against Forge held by Swiss Re and QBE as a consequence of having paid out, must be taken into account in the calculation of (and reduction in) their loss. They argue that having not taken the course of attributing a value to these rights, Swiss Re and QBE have failed to quantify their loss.

646. The plaintiffs’ response is that they suffered loss by paying out and none of it is avoided unless and until a recovery is actually paid to them. They have accounted for the sums received by them.

647. During the hearing, the plaintiffs offered to execute an assignment in favour of the defendants for any amounts subsequently received from Forge.

648. There is no contention that Swiss Re and QBE have failed to mitigate their loss.

649. Given my conclusion that there is no liability to the plaintiffs, it is not necessary to resolve this issue.

650. There is no evidence which enables the Court to make a finding as to the value, if any, of the further right of indemnification. It is therefore not possible to find on the evidence that any specific reduction is warranted. It is not necessary to resolve whether this means that the plaintiffs have not established quantum or that no reduction would be warranted in any event. I incline to the latter but I also incline to the view that any difficulty would have been resolved by an appropriately executed assignment.

651. Questions of proportionate liability do not arise. The plaintiffs’ claims against the insurers must also be dismissed.

652. It is also not necessary to intrude into the question whether, had the plaintiffs succeeded, they would be entitled to the benefit of all the insurance monies under the policies with the insurers as they contend, or to a lesser amount, (i.e. less defence costs) incurred by the insurers in these and other proceedings as the insurers contend, or whether the insurers are liable to pay interest pursuant to ss 100 and 101 of the Civil Procedure Act 2005 (NSW) outside the policy limit [93] (as the plaintiffs contend) or are only liable to pay interest to the extent that it falls within policy limits (as the insurers contend).

     93. $50 million.

642. The plaintiffs acknowledge that the insurers’ position on both issues is supported by Chubb Insurance Co of Australia Ltd v Moore [2013] NSWCA 212 (Chubb) and that the Court is bound by the decision. The plaintiffs put a formal submission that Chubb is wrong and that the correct position is as decided in BFSL 2007 Limited & Ors (in Liquidation) v Steigrad [2013] NZSC 156.

Conclusion

654. The proceedings are dismissed.

655. I will hear the parties on costs should this be necessary and on any other issues which remain to be decided.

656. The exhibits are to be returned.

**********

Endnotes

(1) If any person (hereinafter in this Part referred to as the insured) has, whether before or after the commencement of this Act, entered into a contract of insurance by which the person is indemnified against liability to pay any damages or compensation, the amount of the person’s liability shall on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability.

(2) If, on the happening of the event giving rise to any claim for damages or compensation as aforesaid, the insured (being a corporation) is being wound up, or if any subsequent winding-up of the insured (being a corporation) is deemed to have commenced not later than the happening of that event, the provisions of subsection (1) shall apply notwithstanding the winding-up.

(3) Every charge created by this section shall have priority over all other charges affecting the said insurance moneys, and where the same insurance moneys are subject to two or more charges by virtue of this Part those charges shall have priority between themselves in the order of the dates of the events out of which the liability arose, or, if such charges arise out of events happening on the same date, they shall rank equally between themselves.

(4) Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured; and 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:

Provided that, except where the provisions of subsection (2) apply, no such action shall be commenced in any court except with the leave of that court. Leave shall not be granted in any case where the court is satisfied that the insurer is entitled under the terms of the contract of insurance to disclaim liability, and that any proceedings, including arbitration proceedings, necessary to establish that the insurer is so entitled to disclaim, have been taken.

(5) Such an action may be brought although judgment has been already recovered against the insured for damages or compensation in respect of the same matter.

(6) Any payment made by the insurer under the contract of insurance without actual notice of the existence of any such charge shall to the extent of that payment be a valid discharge to the insurer, notwithstanding anything in this Part contained.

(7) No insurer shall be liable under this Part for any greater sum than that fixed by the contract of insurance between the insurer and the insured.

(a) a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act); and

(b) the person does not have reasonable grounds for making the representation; the representation is taken, for the purposes of this Schedule, to be misleading

(2) For the purposes of applying subsection (1) in relation to a proceeding concerning a representation made with respect to a future matter by:

(a) a party to the proceeding; or

(b) any other person; the party or other person is taken not to have had reasonable grounds for making the representation, unless evidence is adduced to the contrary.

(3) To avoid doubt, subsection (2) does not:

(a) have the effect that, merely because such evidence to the contrary is adduced, the person who made the representation is taken to have had reasonable grounds for making the representation; or

(b) have the effect of placing on any person an onus of proving that the person who made the representation had reasonable grounds for making the representation.

(4) Subsection (1) does not limit by implication the meaning of a reference in this Schedule to:

(a) a misleading representation; or

(b) a representation that is misleading in a material particular; or

(c) conduct that is misleading or is likely or liable to mislead; and, in particular, does not imply that a representation that a person makes with respect to any future matter is not misleading merely because the person has reasonable grounds for making the representation.

(a)    has aided, abetted, counselled or procured the contravention; or

(b)    has induced, whether by threats or promises or otherwise, the contravention; or

(c)    has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or

(d)    has conspired with others to effect the contravention.

Decision last updated: 02 March 2018