Unveiling the puzzle: lenders' appeal falls flat as Arrium officers avoid personal liability

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In a recent decision, Anchorage Capital Master Offshore Ltd v Sparkes [2023] NSWCA 88, lenders to the Arrium Group, a company that collapsed, have lost their appeal regarding the personal liability of the Chief Financial Officer and Group Treasurer. The NSW Supreme Court had previously dismissed the lenders' claims, and the Court of Appeal has now affirmed that decision.

The lenders argued that the company officers were involved in misleading and deceptive conduct by authorising the preparation and issuance of drawdown notices on the company's loan facilities. These notices contained representations that the company was solvent and that there had been no adverse changes in its financial position. However, shortly after the drawdown notices were issued, the company entered voluntary administration. The lenders claimed that they advanced funds to the company based on these representations, which they now believe were false.

Below we delve into the key events and legal battles surrounding Arrium's collapse, highlighting the purported misrepresentations made by company officers and the subsequent fallout.

The mining consumables business: Arrium's jewel

Arrium Limited, an Australian public company, held a diversified portfolio of businesses spanning multiple countries, including its prized Mining Consumables (MolyCop) division. MolyCop was regarded as the crown jewel of Arrium, contributing significantly to its overall success.

As iron ore prices plummeted in FY15, Arrium faced severe financial challenges. To address its mounting debt, the company's board initiated a strategic review. This review encompassed various aspects, such as the sale of MolyCop, evaluating the viability of remaining businesses, and proposing a restructuring plan that required lenders to write off a significant portion of Arrium's debts.

Misrepresentations and debt agreements

Between December 2015 and February 2016, Arrium issued numerous drawdown and rollover notices to lenders. These notices contained representations stating that there had been no material adverse effect on Arrium's financial position and that the company remained solvent. However, these representations would later be called into question.

The going concern note and voluntary administration

In February 2016, bids for MolyCop were deemed unacceptable by Arrium's board. Concerns regarding the company's financial viability prompted the inclusion of a Going Concern Note in Arrium's half-year accounts. Subsequently, lenders rejected the proposed recapitalisation plan, leading the directors to place Arrium into voluntary administration in April 2016. Eventually, in June 2019, Arrium went into liquidation.

Following Arrium's collapse, legal proceedings were initiated, including an insolvent trading claim against Arrium's directors and two sets of proceedings brought by groups of banks. The plaintiffs alleged that they had advanced funds to Arrium based on false representations and sought to establish that earlier administration would have resulted in better returns for creditors.

The Court of Appeal's findings

The NSW Court of Appeal, however, upheld the primary judge's finding that Arrium was not insolvent at the time the drawdown notices were issued. The Court distinguished between "present insolvency" and the "prediction of the prospect of inability to pay a future debt when it becomes payable." As a result, the representations made in the drawdown notices were not false at the time they were made.

Furthermore, the Court of Appeal agreed with the primary judge's decision that the company officers did not engage in misleading or deceptive conduct. The Court considered that the involvement of the officers in making the representations was part of their role "as organs of the company", rather than as individuals. Therefore, a reasonable reader of the drawdown notices would not interpret the representations as being made by the officers personally.

Additionally, the Court affirmed the primary judge's finding that the company did not owe the lenders a duty of care in making the relevant representations. The Court emphasised that the lenders had the ability to protect themselves commercially and that they did not rely on the company's representations due to their capacity to make their own informed commercial judgments.

Lessons learnt

Arrium Limited's journey from a prominent Australian company to liquidation is a reminder of the perils faced by businesses in challenging economic environments. The case serves as a cautionary tale for companies grappling with financial difficulties, emphasising the importance of transparent financial reporting, diligent risk assessment, and adherence to fiduciary responsibilities.

The legal proceedings shed light on the complexities of establishing liability in cases involving misrepresentations and financial losses. The proceedings also highlight the need for lenders to conduct due diligence and make independent assessments when advancing funds, rather than relying solely on representations made by company executives.

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