The Arrium proceedings
On 17 August 2021, following a 38 day hearing involving 30 parties, nine law firms, over 35 Counsel, 40 witnesses, hundreds of thousands of documents and thousands of pages of written submissions, the New South Wales Supreme Court (Ball J) handed down its judgment dismissing two related proceedings brought by different lenders (or assignees from lenders) against combinations of the former CFO, former Treasurer, former Acting Treasurer and former Treasury and Finance department employees of the Arrium group, which went into administration in April 2016 (Lender Proceedings).[1]
The Lender Proceedings, and an insolvent trading claim brought by Arrium entities and its liquidators against 10 Arrium directors which conditionally settled on day 34 of the trial, concerned the foreign currency equivalents of approximately AUD 370 million lent to two wholly-owned Arrium subsidiaries under a series of syndicated and bi-lateral facility agreements and also, in one of the proceedings, the equivalent of more than AUD 1.5 billion in debt rollovers by those same entities, between late December 2015 and mid-February 2016 ahead of what became the April 2016 administrations.
In the first of the Lender Proceedings (Anchorage Proceedings) the plaintiffs’ primary damages claim exceeded AUD 180 million, in the second (BoC Proceedings) the plaintiffs’ primary loss claim exceeded AUD 140 million, while the plaintiffs’ primary loss claim in the insolvent trading proceedings exceeded AUD 325 million.
Baker McKenzie acted for the former CFO in both Lender Proceedings, as well as eight of 10 former Arrium directors who were defendants in the insolvent trading proceedings.
The plaintiffs’ claims in the Anchorage Proceedings included that:
- drawdown and rollover notices which were signed by the former Treasurer and/or Treasury or Finance employee(s) (but not the former CFO) negligently contained, or made, misleading personal representations to the lenders that there had been no change in Arrium’s financial position, since 31 December 2012 (under one syndicated facility agreement) or, otherwise, 30 June 2015, which had had a material adverse effect on the ability of the borrower to perform their obligations (MAE Representation) and that no Event of Default or Potential Event of Default had occurred and continued unremedied (No Event of Default Representation).
- the CFO had also breached a duty of care allegedly owed to lenders by directing that all available monies under the various facilities be drawn down or by failing to ensure the MAE Representation and the No Event of Default Representation were accurate.
- the CFO and Treasurer had both “procured” or were “involved in” misrepresentations made by the Arrium borrowers negligently and in breach of contract because they directed the monies to be drawn down (in the case of the CFO) or procured or failed to prevent that occurring.
- the Treasurer had also separately made negligent, misleading representations, in the course of a discussion with one lender, concerning the accuracy of representations made in a particular drawdown notice and the progress of the sale of Arrium’s Mining Consumables business.
The (somewhat simpler) plaintiffs’ claims in the BoC Proceedings included that:
- representations contained in drawdown notices were misleading because a material adverse effect had occurred (on much narrower grounds than alleged in the Anchorage Proceedings) and, also, because the Arrium entities were insolvent at the time those representations were made.
- the CFO and Treasurer had engaged in that misleading conduct because, in the CFO’s case, he had directed that drawdowns be made and, in the Treasurer’s case, because she had authority, and responsibility, under Arrium’s Treasury Policy, to make decisions on drawdowns and was also responsible for causing the execution and issue of the notices which gave effect to her decisions.
The BoC Plaintiffs’ claim that the Arrium entities were insolvent overlapped with the plaintiffs’ similar contention in the insolvent trading proceedings, with the BoC plaintiffs relying entirely on the evidence of an Arrium liquidator rather than adducing their own independent expert evidence.
The claims for damages in each of the three proceedings also included novel bases for the assessment of damages, with:
- the plaintiffs in the Lenders’ Proceedings claiming, amongst other things, that their loss ought be determined by comparing the amounts rolled-over (in the case of the Anchorage Proceedings) or advanced (in the case of the BoC Proceedings) less recoveries (on the one hand) to what was claimed would have occurred under a hypothetical counter-factual in which the Arrium group would have entered administration before the drawdowns and rollovers occurred.
- the plaintiffs in the insolvent trading proceedings claiming that loss ought be assessed by assuming that ~AUD 120 million of ~ AUD 300 million in recoveries referable to the relevant drawdowns (about 80 cents in the dollar) were first applied by lenders against ~ AUD 2 billion in pre-existing debts.
Issues to be considered in Arrium Series
In a series of Client Alerts over the coming month, senior members of the Baker McKenzie team involved in the successful defence of the Arrium proceedings will consider the following issues raised by these proceedings:
- Solvency – determining solvency where current debts are being paid but large debts are due in the relatively distant future
- Do you owe your lender a duty of care?
- When are company employees personally responsible for representations?
- Material adverse change and effect provisions – interpretation and assessment
- Lender reliance and loss causation
- Novel assessments of loss for negligence, misleading conduct and insolvent trading
- Secondary debt trading – assignments of debts and rights of recovery in Australia
[1] Anchorage Capital Master Offshore Ltd v Sparkes (No 3); Bank of Communications Co Ltd v Sparkes (No 2) [2021] NSWSC 1025
