Anchorage Capital Master Offshore Ltd v Sparkes

The Arrium business

1. Arrium was listed on the Australian Securities Exchange (ASX) in October 2000. It operated three main businesses through a large number of subsidiaries (together, the Arrium Group), which together employed over 8,000 employees in a number of different countries. The three businesses were Mining, Mining Consumables and Steel. The Mining division operated mines in South Australia, 60 kilometres from Whyalla and 90 kilometres from Cooper Pedy which produced lower grade iron ore. The ore was exported through a port Arrium owned in Whyalla and was used by Arrium in its steel mill in Whyalla. For the year ended 30 June 2015, Mining reported revenue of $889 million and underlying EBITDA (earnings before interest, tax, depreciation and amortisation) of $90 million. The Mining Consumables business comprised the Moly-Cop grinding media businesses, the Waratah Steel Mill and AltaSteel. It supplied a range of mining consumables including grinding media, wire ropes and rail wheels. The Moly-Cop business was the largest supplier of grinding material in the world. It was (and remains) a successful business and was described as the jewel in Arrium's crown. For the year ended 30 June 2015, Mining Consumables reported revenue of $1,591 million and underlying EBITDA of $211 million. The Steel business included manufacturing operations in Whyalla and two electric arc furnaces in New South Wales and Victoria which processed ferrous scrap metal. It also included downstream retail businesses which distributed the Arrium Group's products and third-party products to the construction, manufacturing and resource markets. For the year ended 30 June 2015, the Steel business reported revenues of $2,870 million and underlying EBITDA of $62 million. During the same period, the recycling division of that business generated $1,073 million in revenue and underlying EBITDA of $8 million.
2. Each of the operating divisions of Arrium had its own finance department, which maintained the financial accounts for the Division, including the preparation of profit and loss statements and cash flows. Each division also operated its own bank accounts, which were generally held with the Australian and New Zealand Banking Group Limited (ANZ). In addition, Arrium also had a shared services function, known within Arrium as the "Finance Division", which provided corporate services across the whole of the Arrium Group including finance, treasury, tax, internal audit, transactional services and business support. The four divisional heads, including the CFO (who headed the Finance Division) reported to the CEO, who at all relevant times was Mr Andrew Roberts.
3. The Arrium Group operated a centralised treasury operation within the Finance Division, which encompassed the management of transactional banking, debt facilities, guarantee facilities, trade finance facilities and the risk management functions. Ms Sparkes, who as Group Treasurer was in charge of those operations, reported to Mr Bakewell. Her responsibilities were set out in Arrium Group's Treasury Policy, about which more will be said shortly.
4. Arrium's cash and borrowings were managed centrally by the Finance Division through Finance, AIOH and another entity known as OneSteel US Group Holdings, Inc. Finance was the lender of inter-company funding and trading transactions within Australian domiciled entities. AIOH was the lender for US dollar denominated funding transactions between Australia and overseas domiciled entities. Mr Bakewell and Ms Sparkes were directors of each of Finance and AIOH.
5. The Group Financial Controller of Arrium was Mr Anthony Brooks, who also reported to Mr Bakewell. Mr Brooks' responsibilities included ensuring and maintaining the integrity of the data in the Arrium Group's accounting systems, preparation of the Arrium Group's month-end accounts, cash flows and forecasts and the preparation of Compliance Certificates certifying the Arrium Group's compliance with its obligations under covenants contained in the facility agreements.
6. The Arrium board typically met ten times a year in each month except April and October. However, during the period with which this judgment is primarily concerned, it met far more frequently than that - in all, on 21 occasions between December 2015 and April 2016. Board papers, which were often voluminous, were typically distributed to attendees (including external advisers) by email several days before the relevant meeting. Mr Mark Edler, the General Counsel and later Company Secretary of Arrium, prepared draft minutes of each board meeting.

The Treasury policy

1. The Arrium Group maintained a written treasury policy, on which the plaintiffs place some reliance. The one in force during the relevant period was dated July 2015 and was approved by the Arrium board on or around 18 August 2015. The policy sets out the respective responsibilities of the board, the Treasury Committee, the CFO, the Group Treasurer and the General Managers Commercial. Section 3.5 of the policy states that the responsibilities of the CFO included the following: • recommend to the Treasury Committee the establishment of, and amendments to, the Policy; • implement all financial accommodation and financial arrangements of Arrium as delegated by the Board; • authorise borrowing, investment and hedging transactions within the constraints of this Policy; • where appropriate, delegate authority for borrowing, investment, and hedging activities; • review and, where appropriate, endorse risk management strategies put forward by the Group Treasurer; • review and oversee the borrowing, investment, and hedging activities which have been delegated to ensure that the Treasury function is meeting its objectives, and the Treasury function has not exceeded Board-approved delegation and exposure limits; • initiate and ensure that timely and accurate cash flow forecasts are always available, taking into account cash profits, working capital movements and capital expenditure. Where necessary, to take action to ensure that the Company has adequate liquidity. This may include initiating the liquidation of working capital, asset sales, suspension of capital expenditure, suspension of EAF [Electric Arc Furnace] operations or other steps to assure liquidity; • make recommendations to the Treasury Committee for new financial instruments and techniques for managing the financial exposures of Arrium; • ensure that the Treasury Committee and the Board is aware at all times of the impact of financial exposures on the profitability of Arrium; and, • provide feedback from the Board, if any, regarding the effectiveness of Treasury reporting and to convey special requests, if any, from the Board to Treasury; • Review and approve new bank accounts; • Oversee business units to ensure that effect is given to Treasury Policy.
2. Section 3.6 of the Policy stated that the Group Treasurer "is responsible for the daily management of Arrium's borrowing, investment and hedging activities". It states that the Group Treasurer's specific responsibilities included: • undertake borrowing, investment and hedging transactions as delegated by the CFO; • undertake negotiations on behalf of Arrium when financial accommodation is required; • make recommendations on the debt funding of Arrium, in light of maturities and forecast requirements at least annually to the Treasury Committee and the Board; • develop strategies to achieve Arrium's financial management objectives that are within the limits of this Policy for consideration by the CFO; • ensure an appropriate spread of debt maturities; • ensure hedge accounting AASB 139 or equivalent is applied to derivatives where practical; • calculate weighted average cost of capital (WACC) and advise business for use in modelling future acquisitions, capital proposals and impairment testing; • make recommendations to the CFO on amendments to the Policy; • quantify and report all of Arrium's exposure to financial risk to the CFO on a monthly basis; • prepare sensitivity analysis and forecasts on financial covenants and recommend strategies to mitigate potential breaches; • ensure that accurate records with respect to Arrium's cash flow requirements are maintained, and that the cash needs of Arrium are met in a cost-effective and timely manner; • maintain all necessary records with respect to the foreign exchange, interest rate and commodity requirements for Arrium; • review and approve authorised officers within established policy guidelines; • report to the CFO the liquidity position and short term forecast liquidity position for Arrium; • highlight the risks of breaching this policy and recommend corrective action to the CFO and Treasury Committee in a timely manner and, • work with businesses to achieve stated financial objectives.
3. The Group Treasurer was also responsible for the preparation of a funding plan for the Arrium Group, which was submitted to the Arrium board for approval annually, usually in or around April or May.
4. Section 4 of the policy deals with liquidity management. Section 4.3, dealing with liquidity risk, relevantly states: Projected Debt levels will be compared against the level of Committed Facilities to the final maturity date of the facility which provides a clear signal of Arrium's liquidity requirements in both the short and longer term. For longer-term management, projections will show expected Projected Debt levels on at least a rolling 12-month basis at monthly intervals and will include monthly cash flow forecasts from Arrium's operating divisions. For short-term management, Treasury's 8-week Forecast will be complied (at daily intervals) from each of the operating divisions of Arrium on a weekly basis. The Group Treasurer will compile information of liquidity available and required.
5. Section 4.4.2 dealing with cash management required the establishment of a liquidity reserve, which was set at $150 million. The Treasury policy gives the following explanation for that figure: The liquidity reserve has been set based on an evaluation of the accuracy of cashflow forecasting historically in Arrium and intramonth movements. This has shown that a reserve of $150 million will adequately cover fluctuations in cashflow within the month. This is calculated at the end of each month.

Other facilities

1. In addition to the Facilities, the Arrium Group had a series of uncommitted facilities which could be withdrawn by Lenders upon notice at any time. These took the form of overdraft facilities, bank guarantees, trade lines, prime receivable financing lines, foreign exchange, commodity and swap lines. As at 30 June 2015, the Arrium Group had access to $583.3 million by way of uncommitted facilities, which had reduced to $385.2 million by 30 September 2015 and to $232.7 million by 31 December 2015. Uncommitted lines were not taken into account in reports to the board on Arrium's liquidity position.
2. Arrium Group's transactional banking facilities were supplied by ANZ. Those facilities included bank accounts, point of sale and merchant facilities, electronic payment facilities including an intraday "pay away" facility that allowed for same day receipt and payment of funds. ANZ also provided certain guarantee facilities including Arrium's WorkCover performance bonds that underpinned the company's self‑insurance status, a facility under which the Arrium Group could elect to sell receivables to ANZ up to a maximum limit and its commercial credit card facilities. The various facilities were primarily provided under a facility offer letter dated 1 November 2013 (as amended). The facility offer letter provided for the facilities to be reviewed annually by ANZ. ANZ had a right to cancel one or more of its facilities after review, after giving notice and engaging in good faith negotiations for a period of at least 30 days.
3. Arrium (through OneSteel US Investments, a Delaware general partnership) had also issued notes in the US bond market with a face value of USD200 million in July 2008. The notes were issued in three series with varying interest rates. The 7% Series 2008 - Tranche 1 with a face value of USD50 million were payable on 9 July 2015, the 7.33% Series 2008 - Tranche 2 with a face value of USD97 million were payable on 9 July 2018 and the 7.43% Series 2008 - Tranche 3 with a face value of USD53 million were payable on 9 July 2020. OneSteel US Investments' obligations under the notes were guaranteed by Arrium, Finance and later AIOH. Arrium made a further issue of notes with a face value of USD200 million in June 2011. Again, those notes were issued in three tranches with various interest rates. The first tranche of USD50 million was due to be paid on 28 June 2018, the second tranche of USD125 million was due to be paid on 28 June 2021. The third tranche of USD25 million was due to be paid on 28 June 2023. Both sets of notes were generally referred to as the USPP Notes.

The facility agreements

1. With two exceptions to which I will come, the facility agreements relevantly contained substantially the same terms. Many of the submissions made during the course of the hearing were made by reference to the Morgan Stanley Facility Agreement and for that reason the terms of that agreement are set out in some detail in this judgment and most of the analysis contained in this judgment is made by reference to that agreement. The two exceptions aside, it was not suggested that the outcome of either case would be different depending on the agreement under which the relevant Drawdown Notices were issued.
2. Clause 6 of the Morgan Stanley Facility Agreement states: The Facility is a revolving facility and will be available for multiple Drawings during the Availability Period. If a Borrower wishes to effect a Drawing (including, to avoid doubt, a Rollover Drawing), it must give a Drawdown Notice to the Lender. A Drawdown Notice is irrevocable and must be: (a) in the form set out in schedule 3; (b) duly completed and signed by an Authorised Officer of the relevant Borrower; and (c) delivered to the Lender on a Business Day no later than 11.00am three Business Days before the proposed Drawdown Date or such shorter period as may be agreed with the Lender. The Drawdown Date specified in a Drawdown Notice must be a Business Day.
3. "Drawing" is defined in cl 1.1 to mean "each loan provided or to be provided by the Lender to the Borrower under this Agreement and, to avoid doubt, includes a Rollover Drawing". "Rollover Drawing" is defined to mean one or more Drawings "(a) made or to be made on the same day that a Drawing matures; and (b) the aggregate amount of which is equal to or less than the maturing Drawing".
4. Clause 4.2 sets out a number of conditions precedent to a Drawing which include: … (b) (no default) no Event of Default or (except in the case of a Rollover Drawing) no Potential Event of Default is subsisting at the date of the relevant Drawdown Notice or at the relevant Drawdown Date or will result from the provision of the Drawing; and (c) (representations and warranties) (except in the case of a Rollover Drawing) each representation and warranty made by each Borrower Party in this Agreement which is required to be repeated under clause 14.3 as at the Drawdown Date is true and correct in all material respects and is neither misleading nor deceptive in any material respect as at the date of the relevant Drawdown Notice and at the relevant Drawdown Date as though it had been made on and as of that date (other than in the case of the representation and warranty referred to in clause 14.1(g) which is made with respect to the facts and circumstances existing on the date indicated on the relevant information, or, at the time the relevant information was provided, as applicable).
5. The representations and warranties are set out in cl 14.1. That clause relevantly provides: Each Borrower Party (except in the case of (i) clause 14.1(i) and 14.1(v), in which case only the Parent, and (ii) clause 14.1(w), in which case each Borrower represents and warrants in relation to itself only and the Parent represents and warrants in relation to itself and each of its Subsidiaries) represents and warrants to the Lender in relation to itself, and the Parent represents and warrants in relation to each Guarantor (as if references in this clause 14.1 to "it" were references to that Guarantor), that: (a) … … (h) (Accounts) the most recent Accounts of the Group and of the Relevant Group are a true, fair and accurate statement of their consolidated financial position as at the date to which they are prepared and disclose or reflect their actual and contingent liabilities; (i) (no material change) in the case of the Parent only, there has been no change in the Group's financial position since the end of the accounting period for its most recent Accounts delivered pursuant to clause 15.1 which constitutes a Material Adverse Effect; (j) … (k) (Event of Default) other than as notified pursuant to an obligation to do so under the Transaction Documents no Event of Default or (except when this representation is repeated) Potential Event of Default, has occurred or continues unremedied; … (m) (solvency) it is solvent and at each Drawdown Date, it will continue to be able to pay all its debts as and when they become due and payable; …
6. "Accounts" is defined in cl 1.1 to mean "consolidated balance sheet, income statement, cash flow statements and statements, reports (including, without limitation, any directors' reports and auditors' reports) and notes, if any, attached to, or intended to read with any of them prepared in accordance with Australian Accounting Standards".
7. Clause 14.3 relevantly states: Representations and Warranties Repeated Each representation and warranty in this Agreement except the representations and warranties set out in clause 14.1(j), (l), (u) and (v) is repeated, with reference to the facts and circumstances existing at the time on each Drawdown Date …
8. "Drawdown Date" is defined to mean "a date on which a Drawing is or is to be made pursuant to a Drawdown Notice".
9. Clause 15 requires Arrium to give the Lender the audited consolidated annual accounts for the Group as soon as possible after the annual balance date (and at the latest 120 days after that date) and the unaudited consolidated semi‑annual accounts for the Group as soon as possible after the first half year of their financial year and at the latest 90 days after the end of that half year. Clause 15.2 states that the accounts must be prepared and, if applicable, audited by a suitably qualified accountant in accordance with the Australian Accounting Standards. Clause 15.1(d) requires Arrium to give to a Lender "within fourteen days after a request by the Lender, such other financial information as the Lender may reasonably require".
10. Clause 16 sets out certain undertakings given by each Borrower Party, including an obligation under cl 16.1(g) that it "will ensure that guarantees in favour of the Lender are in place from the Parent and its Material Subsidiaries (other than a Borrower) at all times". Under cl 16.1(j) each Borrower Party undertakes that "it will not create or allow to exist … a Security Interest over any of its … assets other than a Permitted Security Interest". "Permitted Security Interest" is defined to include a Security Interest existing or created with the prior consent of the Lender or a Security Interest that does not secure monetary obligations with a total value of more than 5 percent of Arrium's Total Assets from time to time.
11. Clause 16.2 provides: Subject to clause 16.3 the Borrowers undertake to the Lender as follows: (a) (gearing) they will ensure that the ratio of Consolidated Net Financial Indebtedness to Consolidated Net Financial Indebtedness plus Consolidated Net Worth will not exceed 0.55 to 1.00 at any time; and (b) (Interest Cover on 12 month rolling basis) they will ensure that the ratio of EBITDA to Debt Service for any rolling 12 month period ending on a Reporting Date will exceed 3.35 to 1.00.
12. Clause 17.1 relevantly states: Events of Default Unless waived by the Lender, each of the following is an Event of Default (whether or not it is in the control of the Group): (a) … … (c) (representations and warranties) a representation and warranty given by an Obligor [that is, Arrium, a borrower or a guarantor] in a Transaction Document is untrue, incorrect or misleading in a material respect when made or deemed to be repeated, the consequences of which the Lender (acting reasonably) considers constitutes a Material Adverse Effect and such consequences are not remedied within 15 Business Days of receipt of notice from the Lender requiring such remedy; … (i) (material adverse change) a change occurs in the financial condition of the Relevant Group, or a change occurs in the whole or a major part of Business Operations of the Relevant Group, which constitutes a Material Adverse Effect (and the situation is not remedied within 15 Business Days of being required to do so by notice from the Lender); …
13. "Material Adverse Effect" is defined in cl 1.1 to mean "any thing which has a material adverse effect on a member of the Relevant Group's ability to perform the obligations under a Transaction Document". "Business Operations" is defined to mean "the production, manufacture, recycling, distribution and sale of iron ore, mining consumables, steel and related products, building and construction materials and other materials being recycled, and such activities as may be related or ancillary thereto". "Potential Event of Default" is defined to mean "any event, thing or circumstance which with the giving of notice, the passage of time, or both, would become an Event of Default".
14. Clause 17.2 provides: Effect of Event of Default (a) If an Event of Default occurs, the Lender may by notice to the Borrowers: (i) declare that the Amount Owing is: (A) due and payable on demand; or (B) immediately due and payable; (ii) cancel the whole or any part of the Commitment with immediate effect; or (iii) do both (i) and (ii) above. (b) On receipt of a notice under paragraph (a)(i), each Borrower must immediately pay the Amount Owing (including the Principal Outstanding) to the Lender.
15. Clause 30.6(b) provides: The rights, Powers and remedies provided to the Lender in the Transaction Documents are in addition to, and do not exclude or limit, any right, power or remedy provided by law.
16. Clause 31.7 provides: Authorised Officers and communications Each Borrower Party irrevocably authorises the Lender to rely on: (a) a certificate by any person purporting to be a director or secretary of the Borrower Party as to the identity and signatures of its Authorised Officers. Each Borrower Party warrants that those persons have been authorised to give notices and communications under or in connection with the Transaction Documents; and (b) any notice or other document contemplated by any Transaction Document which bears the purported signature (whether given by facsimile or otherwise) of an Authorised Officer of the Borrower Party.
17. "Authorised Officer" is defined in cl 1.1 to mean: (a) in the case of a Borrower Party, any person from time to time nominated as an Authorised Officer by that Borrower Party by a notice to the Lender and in respect of which: (i) the identity of that person has been verified to the Lender's satisfaction in order to manage the Lender's anti-money laundering, counter-terrorism financing or economic and trade sanctions risk or to comply with any laws or regulations in Australia or any other country; and (ii) the Lender has not received notice of revocation of the appointment; …
18. Schedule 3 of the agreement is in the following terms: Drawdown Notice (Clause 6) BORROWER'S LETTERHEAD To: [name and address of Lender] Attention: [ ] We refer to the Facility Agreement dated [ ] 2014, as amended from time to time (Facility Agreement). Under clause 6 of the Facility Agreement: 1. We give you irrevocable notice that we wish to draw down under the Facility Agreement on [ ] 20[ ] (Drawdown Date). Note: Drawdown Date must be a Business Day - see clause 6 2. The aggregate principal amount to be drawn is [ ]. 3. Particulars of each Drawing required are as follows: Amount Interest Period [ ] [ ]

Note: Amounts to comply with clause 7.2. Interest Periods to comply with clause 8. 4. [If not a Rollover Drawing] We request that the proceeds of each Drawing be remitted to account number [ ] at [ ] [insert alternative Instructions, if required]. [If a Rollover Drawing] We request that the proceeds of this/each Drawing be applied to repay the Drawing[s] made pursuant to the Drawdown Notice dated [x]. 5. We represent and warrant that: (a) [(except as disclosed in paragraph (c)] the representations and warranties in the Facility Agreement which are required to be repeated under clause 14.3 are true as though they had been made at the date of this Drawdown Notice and the Drawdown Date specified above in respect of the facts and circumstances then subsisting (except for the representation and warranty in clause 14.1(g) which is repeated with reference to the facts and circumstances existing on the date indicated on the relevant information, or, at the time the relevant information was provided, as applicable); (b) [(except as disclosed in paragraph (c)] no Event of Default [or Potential Event of Default] [1] is subsisting or will result from the provision of the Drawing(s); [and] (c) [details of the exceptions to paragraphs (a) and (b) are as follows: [ ], and we [have taken][propose] the following remedial action: [ ]. We acknowledge that inclusion of a statement under paragraph (c) will not prejudice the rights of the Lender under the Facility Agreement. Expressions defined in the Facility Agreement have the same meaning in this Drawdown Notice. Dated: For and on behalf of [*] ……………………………. Authorised Officer Name: Title:

1. As I have mentioned, there are two respects in which a facility agreement is said to be materially different from the Morgan Stanley Facility Agreement. First, as already referred to, cl 18.1(i) of the 2013 SFA, dealing with representations and warranties, states the no material change representation in these terms: (no material change) in the case of the Parent only, there has been no change in the Group's financial position since 31 December 2012 which constitutes a Material Adverse Effect
2. Second, in the case of the BBVA Facility Agreement, the pro forma Drawdown Notice set out in Schedule 3 refers to cl 13.2 (the equivalent of cl 14.2 of the Morgan Stanley Facility Agreement) rather than cl 13.3 of the agreement (the equivalent of cl 14.3 of the Morgan Stanley Facility Agreement). Clause 13.2 of the BBVA Facility Agreement and cl 14.2 of the Morgan Stanley Facility Agreement contain representations in a relation to a trust. The Drawdown Notice provided to BBVA on 10 February 2016 followed accurately the form of Schedule 3 and referred to cl 13.2. The reference to cl 13.2 is plainly the result of a typographical error. Clause 13.3 of the BBVA Facility Agreement is the clause that requires representations to be repeated. Clause 13.2 does not. Consequently, when Schedule 3 of the BBVA Facility Agreement refers to "the representations and warranties in the Facility Agreement which are required to be repeated under clause 13.2", it must be read as referring to the representations and warranties required to be repeated under cl 13.3. The actual notice must be read in the same way.
3. It can be seen from the provisions referred to that relevantly the structure of the facility agreements is that the Borrowing Parties and the Parent make certain representations which are contained in cl 14.1 of the Morgan Stanley Facility Agreement. The MAE Representation is made by Arrium alone. The other relevant representations are made by each Borrower in respect of itself and by Arrium in respect of itself and each member of the Arrium Group. The No Event of Default Representation extends to cover Potential Events of Default when the representation is first made (on entry into the agreement), but not on other occasions. Under cl 14.3 and its equivalents, the representations are repeated at the time of each Drawdown Date - that is, the date at which money is advanced or rolled over pursuant to a Drawdown Notice or a Rollover Notice.
4. Under cl 4.2 and its equivalents, it is a condition precedent to each drawdown (but not rollover) that (1) no Event of Default or Potential Event of Default is subsisting; (2) the representations made by virtue of cl 14.3 are true and correct and not misleading nor deceptive. Under cl 17.1(c) and its equivalents, unless waived by the Lender, it is an Event of Default if (1) a representation is untrue, incorrect, misleading or deceptive in a material respect; (2) the Lender reasonably considers it to have a Material Adverse Effect and gives notice to that effect; and (3) the consequences are not remedied within 15 Business Days. If an Event of Default occurs, the Lender may terminate the facility and demand repayment of the total amount owing. It is also an Event of Default if there is a change in the financial condition of the Group, or a change in the whole or a major part of Business Operations of the Group, which constitutes a Material Adverse Effect and the situation is not remedied within 15 Business Days after being required to do so by the Lender.
5. The representations made by the agreements are repeated in the Drawdown Notices. However, the representations made by the Drawdown Notices are made both at the time of the notice and at the time of the Drawdown Date. More significantly, in the case of new drawings (but not rollovers) a representation is made by the notice that there is no Potential Event of Default subsisting. That representation mirrors the condition precedent included in cl 4.2(b) and its equivalents.

Proposal for Strategic Review

1. In about June 2015, as part of its strategy, budget and business planning process, Arrium commenced work on a strategic review to assess the options available to it to address its debt position (the Strategic Review). The Strategic Review occurred against a backdrop of a rapidly declining "spot" price for iron ore in early 2015 and the fact that approximately $1.125 billion of Arrium's debt was due to mature in the period from July 2017 to December 2017 and the balance was due to mature between July 2018 and July 2023. In connection with the Strategic Review, Arrium engaged UBS and Lazard to advise it on available options and strategies.
2. The Arrium board met for two days on 18 and 19 May 2015. At that meeting, the board considered the FY16 Budget and Plan, which included a budget for the financial year and a five-year business plan. At the same meeting, Mr Roberts presented a paper setting out the strategic options available to the company. The paper (dated 13 May 2015) provided the following background in relation to the review: Arrium's net debt as at the end of April 2015 was $2.0B, equivalent to 6.2x the latest draft May forecast underlying EBITDA for FY15 of $326M. The draft May forecast has net debt in a range of $1611-1771M as at 30 June 2015 (4.9-5.4x FY15 forecast underlying EBITDA), which is $180-340M higher than 31 December 2014 largely due to negative operating cash flow and $110-130M due to lower period end FX. Further restructuring of the Mining business is needed and will reduce the cash drain of this business on the Group in FY16 if iron ore prices remain at current levels. Iron ore prices are expected to remain volatile over the next 18 months, but are considered unlikely to significantly increase from current levels. Even with the improved cash position from further restructuring of the Mining business, based on the draft Budget and Business Plan the Group is not expected to generate any significant cash to pay down debt in the next 18 months, absent asset sales. Interest cover is expected to be close to covenant levels at 30 June 2015 and 31 December 2015 and is then forecast to improve under the draft Budget & Business Plan as Steel earnings improve. The company is in the final stages of finalising a $200M refinancing of a $370M syndicated facility expiring in July 2016, however, the process has been extremely difficult. A larger syndicated and bilateral facilities of ~$900M is due to become current in July 2016 and lenders have indicated that refinancing this will be a challenge if the company is unable to proceed with its current refinancing strategy to in part refinance this facility through an Asian subordinated debt issue and business cash flows do not improve. The subordinated debt market is currently closed to Arrium due to the decline in iron ore prices and it remains uncertain if and when this market might reopen. [footnotes omitted]
3. The paper set out the following options to deal with Arrium's future-maturing debt: • Asset sales - Sell Steel or Mining Consumables. A sale of Mining is not considered feasible at present given its cash negative position at current prices. • Refinance - Renegotiate existing facilities on a secured basis for extended tenor/reduced covenants and/or refinance existing facilities through markets for sub-investment grade debt (eg Term Loan B). • Recapitalise - Seek funds from existing shareholders or seek new shareholders. • Debt Restructuring / Work-out - Engage with lenders and negotiate a work-out plan under which a plan is agreed to pay-down debt (in time). The paper identified the sale of Mining Consumables (which became known as Project Columbus) as the preferred option. It recommended that before the June 2015 board meeting, UBS and Lazard be appointed as financial advisers in relation to the potential sale and that Arrium start preparatory work for the sale.
4. Also included in the board papers was a memorandum dated 12 May 2015 prepared by Mr Bakewell in relation to the funding plan and a paper prepared by Grant Samuel, who had been retained by Arrium to give advice on debt restructuring options (which became known as Project Archer). That paper stated: In the absence of a material improvement in its credit standing achieved through substantial deleveraging in the immediate term, we do not believe Archer [that is, Arrium] will be able to refinance its existing debt volume under its current capital structure. Grant Samuel recommended that Arrium agree to provide security for its debt and seek to establish a multi layered capital structure. The proposal that Arrium offer security to Lenders in exchange for reduced financial covenants and an extension in its facilities became known as an "Amend and Extend" proposal.
5. In a further memorandum prepared by Mr Roberts in relation to Project Columbus, Mr Roberts set out an overview of the key considerations and planning for a potential divestment of the Mining Consumables business. That paper observed that "Based on advice received from UBS and Lazard, Arrium Management expects the sale of Mining Consumables to deliver gross proceeds of A$1.7 - $2.2bn…".

Strategic Review approved

1. The Arrium board approved the Strategic Review at a board meeting on 12 June 2015. In a memorandum to the board dated 8 June 2015, Mr Roberts explained the Strategic Review in these terms: Key elements of the Strategic Review which will be progressed in parallel are: • a sale process for the Mining Consumables business to determine the achievable sale price (Project Columbus); • an internal review to develop plans for the Steel and Mining businesses on a standalone basis (Project Marco); • a process to engage lenders on the terms on which the company might move to a secured debt platform and subsequently refinance debt through US debt markets (Project Archer); and, • a broad program for engagement with key stakeholders regarding strategic options. … In addition to these planned proactive elements of the Strategic Review, Arrium will be prepared to respond to inbound enquiries, including from parties interested in Steel, Mining or the whole of Arrium. The appropriate response to such parties will depend on the nature of the interest expressed. However, the general approach will be to seek sufficient details from the inbound enquirer of the nature of their interest, key components of their approach, and potential hurdles to enable an assessment to be made of both potential value and executability. …
2. The memo contemplated that the three identified projects would occur in parallel and that the following preparatory steps would be taken in June and July 2015: • Vendor due diligence • IM preparation COLUMBUS • Transaction structuring • Buyer identification • Pre-marketing • Overheads review MARCO • Standalone financial modelling • Finalise restricting plans for Mining, OMC / ATM, Recycling (already underway) • Equity story for NewCo • Detailed feasibility review for granting security in return for covenant relief ARCHER • Bank meetings and formal request issued - response received late July • Ratings review (Refi + NewCo) STAKE-HOLDERS • Initial engagement regarding strategic options following strategic review announcement

1. The memo also contemplated that UBS and Lazard would be appointed to advise on Project Columbus and to provide assistance with Project Marco, that Grant Samuel and Lazard would advise on Project Archer and that Herbert Smith Freehills (HSF) would be appointed as legal advisers on the Strategic Review.
2. Arrium investigated a number of other proposals during the course of the Strategic Review. Some are mentioned later in this judgment. Others included (1) Project Chess, which involved the partial investment in or full acquisition of the Arrium Group's steel business by Brookfield and which had been on foot before the commencement of the Strategic Review; (2) Project Green, which involved discussions with Asia Pacific Resources Development (APRD) about a takeover of Arrium by that entity; and (3) Project Blue, a proposal by a group of Korean institutional investors initially to takeover Arrium and then to recapitalise it. Ultimately, those projects came to nothing; and it is not suggested that their existence or the work done on them are relevant to the outcome of these proceedings. For that reason, they are not discussed further in this judgment. Similarly, during the course of the Strategic Review, Arrium had discussions with the Commonwealth and South Australian governments about the future particularly of its steel business in Whyalla. But again, the nature and outcome of those discussions are not said to be relevant to the issues in these proceedings. They, too, are not dealt with further in this judgment.
3. On 15 June 2015, Arrium announced its Strategic Review publicly. The announcement stated that "The review includes an assessment of options for achieving an appropriate structure and level of debt. This will include the potential divestment of significant assets or businesses."

Meetings with Lenders in relation to Project Archer

1. After the announcement of the Strategic Review, one or more of Mr Bakewell, Ms Sparkes and Ms Pearce spoke to the Lenders about whether they would participate in a further refinance. According to evidence given by Ms Sparkes, she attended a meeting with representatives of one or another of the Lenders a couple of times a week. The meetings were usually with Mr Bakewell, sometimes Mr Bakewell and Ms Pearce and occasionally with Ms Pearce alone.
2. PowerPoint presentations were also given to the Lenders in July 2015. The presentation described Project Archer in these terms: Stage 1 ▪ Arrium offers senior lenders general security over its assets • Lenders are elevated in the capital structure ahead of all other unsecured creditors • Credit position of lenders significantly improved ▪ Arrium in return requests from lenders • A revised covenant package - Interest Cover > 2.0x - Gearing ; prevailing spot prices, there is significant risk around Arrium achieving these forecasts
3. The note included the following comments on the meeting: We have been concerned about the risk of loss on the Arrium exposure since categorisation, and remain so. At our meeting with the CEO, CFO and Treasurer on 5 May 2015 we outlined to Arrium how we hoped they would handle the banking syndicate, to minimise the risk of secondary debt trading (or other lender driven issues) negatively impacting on thrit [sic] strategies to address their overleveraged position and market concerns re viability. We understand that other banks put forward similar views re information and consultation, which have been effectively ignored. Syndicate engagement has generally been regarded as reluctant and dismissive of valid Bank concerns, although there has been selective dialogue with Banks regarding as more important to outcomes than others - including recently Nab (FY16 forecasts discussed last week). A proposal to grant Banks security earlier this year did not progress. Syndicate and bilateral lenders rank pari passu unsecured with US Noteholders. The dilemma for the Arrium board is well understood by the banks and the market. If the Molycop business is sold as planned, leaving Steel, Mining and Recycling, there may be no remaining value or bankable proposition given the poor outlook for Mining and uncertainty for global Steel. Banks have no visibility on a likely sale price for Molycop divestment. If the Bank's forecasts do not support such a request Arrium may need to negotiate this prior to announcing any sale. The outlook for Arrium and its lenders is uncertain at best. FY16 forecasts are weighed towards 2H EBITDA and assume an iron ore price above the current spot. Despite direct and indirect pressure from Hedge Funds / Advisors / Distressed Debt traders and our concerns around the fundamental value of Arrium falling below its debt, we are not looking to be the first bank to sell at a discount, however, if one or more of the senior lenders do exist (as is being rumoured) we will need to decide quickly whether to sell at a loss [redacted] or remain as a lender. There is no doubt that a number of lenders are agitated about the approach of Arrium and the uncertainty as to the Molycop outcome, including Nab.
4. It is not entirely clear what was discussed at the meeting with Westpac. It appears that Mr Roberts and Mr Bakewell gave Westpac an update on Arrium's financial position.
5. Coincidentally, on the same day there was a meeting of BOC's credit committee. The minutes of that meeting record Mr Patrick Lynam, Chief Risk Officer, as saying "Noted the very significant fall in iron ore prices and the stress that this would be causing Arrium. And that if the Molycorp sale does not proceed, Arrium may have material difficulties. …".

EY reports on Project Polo

1. On 14 December 2015, EY provided its final report in relation to Project Polo. The report concluded that the existing cash flow forecast "is sufficient for its original intended purpose". However, the report recommended that Arrium should determine "the optimal forecast period to cover an entire working capital cycle (eg. minimum 13 weeks projections at any point in time)". The report also identified a number of "improvement opportunities", including an adjustment to the graph reporting funding and liquidity headroom to draw a clearer distinction between funding headroom and liquidity headroom.
2. In her affidavit evidence, Ms Sparkes was critical of the proposal (that was ultimately adopted) to produce cash flow forecasts for a 13 week period. She explains that different Arrium businesses had different working capital cycles. Moreover, although most of the costs of production (which were incurred early in the cycle) were known or could reasonably be anticipated, the revenue was often difficult to predict because it depended on the prospects of a sale, the price that would be obtained and the payment terms that would be negotiated. Accordingly, the last three weeks particularly of the 8 week cash flows involved a "best guess", and historically were often conservative. In her view, the position was unlikely to be improved by a 13 week forecast.
3. On the day EY delivered its Project Polo report (14 December 2015), Mr Bakewell sent an email to EY expanding the scope of work to be undertaken by them to include "Advice in respect of any contingency planning in relation to liquidity events appropriate to the situation as it evolves". That work expanded into what became known as Project Jacaranda. The agreed scope of works was set out in these terms by EY: You have asked EY to conduct a broad scope review of the Group's businesses and likely returns to creditors in the event of the Board of Directors having to appoint Voluntary Administrators and subsequently, creditors appointing Liquidators. The context of this request is to enable you to have a well-informed negotiation with your existing lenders regarding a comprehensive recapitalisation of the Group's balance sheet that removes any risk in the longer term of the Board needing to consider making such an appointment if business conditions worsen.

Board meeting on 18 December 2015

1. There was a board meeting on 18 December 2015. In his Monthly Operating Report prepared for the purpose of the meeting, Mr Roberts noted that "The Platts 62% Fe fines index fell dramatically during November from a starting point of US$49, finishing at US$44". That was substantially below the assumption included in the November forecast of USD53 for FY16. Commenting on those figures, another board briefing stated: ● Iron ore price has fallen 30% since the start of October ● A significant disconnect has opened up between the spot price and CRU's price predictions ● The Platts %62 fines index is now ~US$39/t and some analysts expect pricing in the US$40-45 range for 6-12 months
2. Also included with the board papers was a memorandum dated 15 December 2015 prepared by Mr Roberts providing an update in relation to the Strategic Review. In that memo, Mr Roberts said: One of the key reasons for embarking on the strategic review was to address the July 2017 debt maturities on the basis that the current and forecast trading conditions and particularly market sentiment regarding Iron Ore, the Chinese economy and the resources sector more broadly would be unlikely to support a refinancing by existing lenders prior to those maturities becoming current in July 2016. In previous scenario analysis that has been undertaken, we had modelled a Marco "downside" scenario with Iron Ore at US$50/t, FX at 75c and Steel EBITDA flat at A$75M. Current iron ore prices and steel margins are below the level assumed in this previously modelled downside scenario. At current iron ore prices and steel margins and with their current cost bases, our Whyalla Mining and Steel businesses are running cash losses in the order of $250M pa (before Project Marco savings). With the recent decline in iron ore prices, work has commenced to examine options to further reduce the cash break-even iron ore price for the Mining operations and optimise ongoing operations for cash. …
3. Mr Roberts also observed: Given that the combined Mining and Steel businesses are currently trading below the "downside", a "Grey Zone" price for Columbus would leave the Group with limited refinancing options and certainly not on the terms and conditions currently in place. As a result it is necessary to consider alternative capital structures and potentially new debt providers as outlined in the Lazard paper.
4. In relation to debt structure and options, the memo said: To date, we have approached three potential new\ lenders, being GSO, KKR and Centrebridge, to understand their interest in providing Arrium with a proposal on a whole of company solution. Both GSO and KKR have indicated a willingness to work with Arrium with appropriate NDA's in place. Centrebridge have declined the opportunity. Consideration will be given to other parties if appropriate. The Debt Structure options and lender work builds on the paper presented by Lazard during the last Board meeting and is covered more fully in the paper included in these materials titled "Capital Structure Options".
5. The memo listed the following "key areas of work to be completed over the next period": ● Project Columbus ● Mining option development, review and optimisation ● Whyalla mothballing option, including steel supply ● Further confirmation of Marco savings and how they compare to mothballing options for Whyalla ● Understanding position of Federal and State Governments ● Refining our Business Plan Scenario's, including sensitivities, and determining appropriate central financing scenario's ● Ongoing liquidity assessments and review ● Capital Structure Options (including standby facility) with existing and new lenders ● Assessment of alternative options
6. The memo explained that Arrium had "developed financial scenarios against which potential divestment, business and debt restructuring options can be assessed, as well as assessment of the balance sheet, cash flow, liquidity and debt covenants of the Arrium Group, taking into account the current external environment". Those scenarios comprised: 1. An "Updated Business Plan" scenario, which modelled the outcome of achieving the FY16 forecast, without a sale of Mining Consumables; 2. An "Updated Business Plan + Columbus (low proceeds)" which modelled a scenario which assumed proceeds of a sale of Mining Consumables at the bottom of the range (that is, USD1.2 billion) and otherwise achieved the FY16 forecast; 3. A "Spot" scenario, which assumed current commodity prices and exchange rates at the time was substituted for the updated independent forecasts in the FY16 forecast and then held constant for the remaining term of the FY16 forecast (slightly more than 4.5 years) and assumed that there was no sale of Mining Consumables; 4. A "Spot + Columbus (low proceeds)" scenario where the proceeds of a sale of Mining Consumables were assumed to be at the bottom of the range (that is, USD1.25 billion); 5. A "Spot + Columbus (mid proceeds)" scenario, with the proceeds of a sale of Mining Consumables at the assumed mid-range (that is, USD1.35 billion); 6. A "Spot + Whyalla mothball + Magnetite mothball" scenario, which was a "Spot" scenario modified to consider the impact of mothballing the Arrium Group's Whyalla steelworks and Magnetite mining operations; 7. A Spot + Whyalla mothball + Magnetite mothball + Columbus (low proceeds)" scenario, which was a "Spot" scenario modified to consider both the impact of mothballing Whyalla and Magnetite, with a sale of Mining Consumables where the proceeds were assumed to be at the bottom of the range (that is, USD1.2 billion).
7. The analysis of the various scenarios itself was attached as an updated business plan to a memorandum dated 16 December 2015 prepared by Mr Bakewell. The analysis explained that the "Whyalla mothball" scenario involved the majority of billets currently produced at Whyalla being replaced by imported billets and the structural mill and rail plant at Whyalla continuing to operate using imported steel. It records that the "Spot" component of each modelled scenario assumed: ● Key external drivers remain at current levels ● Iron ore assumes price flat at US$42/t @ 0.73 FX (A$58/t) ● Steel & Recycling assumes FY16 H2 November forecast volumes and spot steel margins and prices ● Utilises Mine Plan 4.2, a run-down scenario for the Mining business with minimal capital expenditure (further work underway to optimise Mine Plan 4.2 for cash) ● Mining Consumables assumes the November FY16 forecast and a one year delay of the budget and business plan (i.e. FY16 budget becomes new FY17)
8. A summary of the updated business plan was included in the following table: Table [114] - text version (64255, pdf)
9. Mr Bakewell also included in his memorandum two tables summarising the results of the analysis. One table summarised whether Arrium would remain in compliance with the covenants in the facility agreements and a covenant in the agreements governing the terms of the USPP Notes relating to shareholder equity on the different scenarios. The other indicated whether Arrium was predicted to have positive cash flows in future years. Those tables are set out below: Table [115] - text version (54622, pdf)
10. Commenting on the tables, Mr Bakewell said: The modelling shows that the impact of November 2015 spot prices (scenarios 3-7) is demonstrably negative. ICR is breached at some stage under all spot scenarios. Net cash flow is negative in all Spot scenarios for FY17, and most years thereafter, especially if Columbus is sold (scenarios 4, 5 and 7). He also said: Given that the combined Mining and Steel businesses are currently trading below the "downside" scenario, a "Grey Zone" price for Columbus under a "Spot" scenario would make it difficult to sell Columbus under the existing capital structure. … As a result it is necessary to consider alternative capital structures including a potential discount to existing facilities and potentially new debt providers…
11. The Lazard paper referred to by Mr Roberts makes the following points among others:

• Under the heading "Positioning Recapitalisation as the Best Alternative" that "An understanding by creditors of their downside in a voluntary administration will be key to procuring their agreement to a recapitalisation (with or without a Columbus sale)";
• The Arrium Group should identify interim liquidity initiatives including for an AUD250 million "secured standby facility"; and
• Consideration of the impact of voluntary administration on all creditors, if agreements could not be reached, would be important for negotiation with those creditors.

1. Also among the board papers was an update on Project Columbus prepared by Lazard and UBS. The update observed that a number of bidders had dropped out for various reasons, and that the two most promising bidders were Platinum Equity and Argand/Cerberus and that Rhone Capital had yet to provide feedback. In relation to Platinum Equity, the update observed: Platinum Equity remains very engaged in due diligence activities but has not provided an updated view on valuation or financing. Platinum has indicated that it is aware of the current challenges in financing and that as a result it has deferred engaging with financing banks until the new year
2. In relation to Argand/Cerberus the update observed: Argand/Cerberus have been active and have made significant progress in conducting their due diligence. They are working closely with the financing banks to address their concerns. No value feedback has been provided at this stage
3. At one point, UBS Leveraged Capital Markets was considering providing financing to the successful bidder. In relation to that proposal, the update stated: ● The current position of the UBS Leveraged Capital Markets (LCM) team is that at this point there is no prospect of securing credit approval to put indicative terms for an underwritten financing package to bidders. The key reasons for this are: - Leveraged market conditions have deteriorated significantly in recent weeks with spreads expanding and new issuance declining significantly - The conditions for resources related credits have also continued to decline, given the continued deterioration in all commodity end markets - Moly-Cop's Q1 FY16 result and forecast Q2 result demonstrates negative momentum which from an underwriting perspective poses a significant challenge especially given the negative macro environment ● Feedback from bidders and their advisers on the challenging financing environment has been consistent with the above.
4. Despite these events, Mr Bakewell says in his affidavit evidence that he can recall a representative of Lazard or UBS (he cannot remember which) saying words to the effect that "there are still good prospects of a deal in at least the mid-range [that is, around USD1.35 billion]". Elsewhere in his affidavit evidence, Mr Bakewell says that Mr Daniel Kleijn from Lazard said in response to a question from an Arrium director that "we think it is still likely" that Arrium would get at least "AUD$1.35 [scil USD1.35] billion with these interested bidders".
5. Also considered at the board meeting was a memorandum prepared by HSF entitled "Project Jacaranda Phase 1 Memo". Mr Andrew Pike and Mr John Nestel, both partners of HSF, attended the relevant part of the board meeting (Mr Nestel by telephone) and spoke to the memo.
6. The memo explained the context of their advice in the following terms: We understand that the company does not anticipate any liquidity issues in the near term. However, the anticipated refinancing discussions may involve the company proposing that its financiers accept a haircut on their current debt. As part of this work stream, in order to aide negotiations, the company is also undertaking some preliminary modelling work that could be used to illustrate to financiers a possible 'worst case scenario' should a refinancing not be achieved. Given this context we have been asked to set out the relevant legal framework pertaining to the duty on directors to prevent insolvent trading of the company.

Conversation between Mr Bakewell and Mr Nestel in December 2015

1. Mr Bakewell says in his affidavit evidence that having had his recollection refreshed by an email from Mr Nestel on 23 December 2015 (referred to below), he can recall a conversation with Mr Nestel sometime after receiving a letter from ANZ on 10 December 2015 and no later than 17 December 2015 in which he (Mr Bakewell) said that it appeared that ANZ was intent on cancelling its credit facilities, requiring Arrium to hold a lot of cash. According to Mr Bakewell, Mr Nestel replied: I agree. Cash is the best form of liquidity. To help ensure that you have that cash, you shouldn't pay down loans from now on. Put that cash on deposit instead.
2. Mr Bakewell replied that he would need to check with Ms Sparkes because he did not know whether Arrium had already given notice of its intention to repay an amount in December 2015. According to Mr Bakewell, he and Mr Nestel then had a conversation to the following effect: John Nestel said: "You also may as well drawdown all of the facilities to make sure you have enough cash available." I said: "Can we do that?" John Nestel said: "Yes, you can, they are committed facilities. You are entitled to drawdown on those facilities up to the limit." I said: "I have not done that before. Let me talk it over with Delia [Sparkes] and Andrew [Brooks - Arrium's Group Controller].
3. Mr Bakewell says that he then spoke to Ms Sparkes and asked her whether Arrium could stop repaying debt and drawdown all remaining debt. Ms Sparkes replied that it could to which Mr Bakewell replied "Okay, make sure we can do it, and if we can, let's drawdown on the facilities". According to Mr Bakewell, the good sense of that advice was confirmed by Mr Edwards in a telephone conversation Mr Bakewell had with him.

21 December 2015 cash flow forecast and the Bakewell Direction

1. On 21 December 2015, Ms Verawati sent Mr Bakewell and Ms Sparkes, among others, a revised daily cash flow forecast for the 8 weeks starting 21 December 2015 which corrected an error in an earlier draft.
2. Mr Bakewell responded to that email on 22 December 2015 saying: This new graph suggests that we run out of committed lines in early Feb. I'm not sure how this could be correct. Please recheck. What are the key differences between this weeks [sic] forecast and last weeks? What are the big draw downs on 29 Jan, 5 and 22 Feb? Sarah / Delia please examine and get back to me asap.
3. Ms Pearce responded to that email later on 22 December 2015. She included a graph showing the previous week's cash flow forecast and one for the week commencing on 23 December 2015 (Week 52). A copy of the latter graph appears below: Graph [132] (97816, pdf)
4. The dip at the end of December reflected a practice Arrium had adopted of implementing a number of initiatives to reduce its debt at the end of reporting periods. Those initiatives included a short deferral of creditor payments, giving customers who paid early a discount and selling receivables using its discounting facility with ANZ.
5. Commenting on the graph, Ms Pearce said: The following changes have been noted from week 51 to 52: - The peak in total debt on 5 Feb in the week 51 forecast has increased by $50m for the same date (5 Feb) in week 52 forecast. This is primarily an increase in forecast accounts payable, this is the result of more certainty of timing of payment of creditor deferrals, prime repayments and actual accounts payable balances in SAP for processing. - The increase spread between Total drawn Debt (hard green line) and Treasury net debt (dotted green line) is the assumed inclusion of the $60m of cash collateral for ANZ. This cash reduces net debt but gross debt still impacted by the event. The week 52 forecast then extends to show week ending 12 February: - Net outflow in the week ended 12 February is ~$50m, breakdown as follows: ○ Inflow $71m ○ Prime repayments -$30m ○ Raw material purchases -$10m ○ Payroll and redundancies - $20m ○ Accounts payable run - $54m ○ Tax payments -$5m Across the period 1/1/16 - 12/2/16 the debt drawings of ~$600m are required. This is a particularly tight period on liquidity as the period end initiatives wash out. To manage liquidity and the peak you can see in week ended 12/2 we will manage working capital through staggering accounts payable to smooth out liquidity demand, examine inventory and raw material purchases and prime sales to the extent we have availability on our lines. Ms Pearce also set out an indicative debt drawing schedule.
6. On receiving that email, Mr Bakewell sent Ms Pearce and Ms Sparkes an email (which was copied to Mr Roberts) saying: Given the tightness in liquidity identified in the week ending 12 Feb. please put together over the next 24 hours the initial proposed response along the lines outlined in Sarah's email and build that into a more refined version of this current liquidity graph. Please specify in the commentary on the graph the additional measures taken and their impact. Mr Bakewell also forwarded Ms Pearce's email to Mr Lachlan Edwards of Lazard, Mr Kevin Barry of UBS, Mr Nestel and Mr Paul Apathy of HSF.
7. Mr Edwards replied to that email on the same day (22 December 2015) saying: Robert thinking about this after we spoke (sorry it was such a very bad line, so I could not hear everything you said); but it seems to me that there are two possibilities here: 1. There is a fault in the numbers. I just can't work out how the cash outflow during Jan and February is so great. 2. The numbers are right in which case we need to very quickly identify a way to staunch the bleeding as soon as possible.
8. Mr Bakewell responded on the morning of 23 December 2015 saying: The Treasury team are re-checking the numbers. In terms of addressing the underlying issue we have to improve profitability and this is the aim of the significant restructuring that is underway.
9. Mr Nestel, who was in London at the time, also sent a response to Mr Bakewell's email forwarding Ms Pearce's email to him. In that response he said: A key message to your team that we discussed a couple of weeks back perhaps worth you repeating to them is not to pay down any of the unsecured bank lines this month but deposit amounts to reduce net debt.
10. On 23 December 2015, Mr Bakewell forwarded Mr Nestel's email on to Ms Sparkes and Ms Pearce saying: Please see advice below from John [Nestel]. Are we in a position to do this?
11. Ms Pearce then spoke to Mr Nestel. Following that conversation, Mr Nestel sent a further email to Mr Bakewell saying: Robert I've just been on a call with Sarah and Mark and suggested she call you re paying down facilities for 31 December. If notices haven't gone in to banks it would be prudent to retain spare cash in deposits than having to re-draw it.
12. The Anchorage Plaintiffs plead in their Commercial List Statement that "In around December 2015, Bakewell instructed or directed Sparkes and/or Treasury to draw down all available amounts under each of the Arrium Group's available facilities …" (para 73), which is defined as "the Bakewell Direction". They give as particulars of that allegation evidence given by Ms Sparkes in public examinations conducted by the liquidators. In those examinations, Ms Sparkes gave this evidence: Q. Could you go, please, to page 87 of the transcript of 4 April, and please go to line 14 where you give an answer, "We believed, I believed we were solvent based on the scenarios that we had and we were being told to drawdown." This is in January 2016. "I was an authorised officer. The instruction had been to drawdown on the facilities." Do you see that? A. Privilege. Yes. Q. Can you help us with who gave you that instruction? A. Privilege. It was not usual to my discussion before. It was Robert. Q. And it wasn't usual because you were the one in the ordinary course of Arrium's business, you and your group, who would make those decisions, do you agree? A. Privilege. Yes. Q. And these were, you would agree, extraordinary circumstances or not usual circumstances in early 2016? A. Privilege. Yes. Q. What do you recall the discussion being with Mr Bakewell? A. Privilege. I had resigned by this point. There really wasn't a lot of discussion going on between Mr Bakewell and myself. We were talking about whether we drew down all of the facilities or not, that's it in a nutshell. Q. Can we take it that at the time this instruction was given it wasn't the usual situation where you were sitting there with the forecasts and working out how much money we needed by reference to the forecasts. That's right, isn't it? A. Privilege. Yes. Q. Were you comfortable with the instruction that Mr Bakewell gave you? A. Privilege. I believed we were solvent, I believed we were in compliance with our documents and I believed it was within our rights to drawdown those facilities. Q. And what did he instruct you to do, as best you can recall? A. Privilege. I actually don't know that he instructed me personally. Q. I thought you said Robert? A. Yes, but I say we were being told. The communication between Robert and I had broken down quite significantly. Privilege. So it was probably coming from one of my team.
13. However, this passage does not support the proposition that Mr Bakewell gave the alleged instruction in December 2015; and it is difficult to reconcile the allegation he did with the emails on 22 and 23 December 2015. Despite what Mr Bakewell says in his affidavit evidence about the conversations between 10 and 17 December 2015, it seems plain from the emails of 22 and 23 December 2015 that the advice that Mr Nestel gave was that, instead of repaying debt and then redrawing it, Arrium should hold any spare cash on deposit to avoid incurring new debts. That was prudent advice in the circumstances. In any event, it is plain that neither Mr Nestel's advice nor Mr Bakewell's alleged instruction was acted on, at least in December 2015.
14. On 24 December 2015, Ms Pearce sent Mr Bakewell and others an email setting out a revised cash flow forecast. The following graph was included in her email: Graph [143] (121640, pdf)
15. Ms Pearce explained that "The following initiatives and updates have been made to the forecast": ● Accounts payable forecast was overstated by $50m, this has been updated ● Additional creditor deferrals of $10m targeted by Steel have been included ● Mining consumables $14m credit deferrals (bar supplier) have been included ● Prime is planned to be used in the first 2 weeks of February ~$30m (previously $20 at the end of January) ● Corrections were made to the forecast to accurately reflect the forecast prime repayments across the period
16. On 28 December 2015, Mr Roberts sent the week 52 liquidity forecast to the Arrium directors stating that "the current position outlines the importance of the StandBy Facility as well as the whole of company refinancing with KKR and GSO which is progressing and we will provide an update next week". In the meantime, on 22 December 2015, Mr Colin Galbraith resigned as director of Arrium.

Ms Sparkes' telephone call with Morgan Stanley

1. On 30 December 2015, Mr Pedro Panizo of Morgan Stanley sent Ms Pearce and Ms Verawati, among others, an email asking for a call with Ms Sparkes as soon as possible to discuss a Drawdown Notice for USD37.5 million that Arrium had served on 29 December 2015 under the Morgan Stanley Facility Agreement. The email explained that: We'd like to understand the rationale for the drawdown, whether the drawdown is intending to retain our position fully drawn, the liquidity position of the company and status of the different businesses / sale process that provide comfort to the company on the representations for the drawdown.
2. That call occurred on 31 December 2015 between Ms Sparkes and a number of representatives of Morgan Stanley, including Mr Panizo, Mr Rick Ball, Morgan Stanley's Vice-President of Investment Banking in Australia, Ms Janie Park and Ms Peggy Wong. Reporting on the call, Ms Park said in an email to Mr Ed Diaz-Perez that: Had a call with Arrium this morning. Not extremely helpful, but the treasurer did confirm they will be in compliance with the covenants on Dec 31 and that they are comfortable with all the reps made. Reason for drawdown is for general WC and us not having been fully drawn would have been 'unusual'. Didn't provide specific figures but Dec liquidity slightly worse than Jun due to lower OCF and some payments on restructuring costs (no figure provided). Sales process is ongoing but not much else disclosed there. If the sale doesn't go through, restructuring with banks would be Plan B but they have not started discussions with main banks. She noted they may resume 'project archer' which was offering security in exchange for lower covenants. Mining - further cost reduction talks with suppliers and potential mine plan change but she's 'confident' of getting to cash positive at current levels.
3. On 31 December 2015, Ms Wong sent Ms Park a note of the meeting, which Ms Park returned with her marked-up changes. The note (including Ms Park's changes) relevantly states: 1. Reason for drawdown on 100% of our facility and if it's in similar proportion to the syndicated loans, liquidity status (uses of cash and post drawdown, remaining liquidity) ● The drawdown is for general WC purpose. The 100% drawdown is not the same across syndicated and bilateral facilities. The company takes turn to draw different facilities. ● Liquidity as of Dec 2015 is weaker than Jun 2015 because of i) iron ore not providing cash like before (overall company still generating cash) and ii) payment for mining restructuring cost (did not provide the amount incurred in the half year but would expect some restructuring provisions to be remaining) ● Company will be in compliance with covenants as of Dec 2015 and are comfortable with the representations made in the drawdown request letter 2. Mining division cash burn rate at current prices and at what point they would consider shutting the mine ● Company's preference is to lower cost rather than shutting the mine (though this option and the associated closure cost are also being considered) ● It is going back to suppliers (next week or 2) to negotiate for lower cost. This is the key to achieve lower production cost. It will also reassess the mine plan to see how to optimal production and cost. The treasurer is confident that Arrium can reach cash breakeven at the current low iron ore price level with these further restructuring … 5. Steel cost out progress and post-restructuring break even price; likely government support (like Bluescope) ● Steel has been benefiting from low scrap price, strong volume and better Asia margin (which was low in Aug but flattened in Nov & Dec) so the result was not too bad ● The company continues to have very regular dialogue with the government on issues of anti-dumping, Whyalla and unions 6. Status update on the sale process of mining consumable ● It is still ongoing with the aim to have a result by end-Jan. One bidder joined late (a few months/a quarter later) and management presentation has been done to the new bidder ● On the question of the adequate bid price, the treasurer responded it's a directors liabilities question of whether to proceed with the sale such that the remaining business is viable 7. Plan B if the sale falls through or the bid price is inadequate ● Company will negotiate with banks. It is exploring different options, including the offering of securities for lower covenant level. Discussions with banks have not yet started ● MS may have been left out of conversations a bit because we are not part of the syndicate
4. No-one from Morgan Stanley gave evidence of what occurred during the telephone call. The Anchorage Plaintiffs did serve an outline of evidence from Mr Ball and a subpoena to give evidence was served on him. However, the Anchorage Plaintiffs elected not to call on the subpoena. It was not suggested that Mr Ball was unavailable to give evidence.
5. Ms Sparkes accepts that the call occurred but says that she cannot now recall what was said. She accepts that she could have said many of the things recorded in the file note. So, for example, she gave the following evidence: Q. If we go to the next email, which is MST.001.001.0010. In the second paragraph there is a sentence there: ... "the treasurer did confirm they will be in compliance with the covenants on [31 December]" ... Do you agree you said something to that effect? A. Yes. Q. Did you say something to the effect that they are comfortable with - that "we are comfortable with the representations made"? A. Yes. Q. I will frame that question again. Do you see it says there: "The treasurer did confirm that they will be in compliance with the covenants on [31 December] and that they are comfortable with all the [representations] made." A. Yes. Q. Did you say to the meeting that "we are comfortable with all of the representations made"? A. I don't recall. Q. But you wouldn't deny that you may have said that? A. It says that I said that, so I accept that I said it.
6. However, Ms Sparkes did deny that she said some of the things set out in the file note on the basis that she did not know them to be true. That included the statement in item 1 to the effect that one of the reasons that liquidity was weaker was because of restructuring costs. Ms Sparkes also stated that she did not tell Morgan Stanley that there was a realistic prospect that the banks may be asked to take a haircut on a whole of company refinance, since that was something she did not know at the time. She also stated that she did not tell Morgan Stanley that ANZ was threatening to cancel its facility unless it got cash collateral.

Telephone call between Mr Bakewell and the Arrium advisers

1. According to Mr Bakewell, on 3 or 4 January 2016 he participated in a telephone conference call with Mr Edwards, Mr Nestel, Mr Roberts and possibly others regarding the position taken by ANZ. During the call, they discussed an email that Mr Edwards had sent setting out two Scenarios in relation to the ANZ. The email described the two scenarios in these terms: Scenario 1: Introduction In this scenario the revised liquidity forecast shows that if the ANZ $60m cash collateral is included in the outgoings then liquidity is available through the annual peak in working capital funding in February. Whilst the liquidity flows will vary, the forecast showing a sizable buffer is likely to be sufficient to allow time for Projects Columbus and Miwok to complete (providing for significant deleveraging) and the implementation of the operating cost savings to return the underlying businesses to cashflow positive. Scenario 2: Introduction In this scenario the revised liquidity forecasts show that if the ANZ $60m cash collateral is included in the outgoings then most (or all) available sources of liquidity will be exhausted between now and the annual peak in the working capital funding requirements through February. If not all, then it also utilizes a significant portion of the liquidity buffer which the Treasury policy indicates is required to absorb unexpected fluctuations in working capital. Hence, if the board did agree to provide ANZ with the $60m cash collateral in this hypothetical scenario then it would be putting the company into a position such that at some point in February it may not to [sic] be able to pay its trade creditors when due.
2. According to Mr Bakewell during a discussion of the email Mr Nestel said words to the following effect: Arrium is in scenario 1 where Arrium's revised liquidity forecast shows there is enough liquidity through February 2016 even after Arrium proves cash collateral to ANZ. I agree this means Arrium is clearly solvent.

Board meeting on 7 January 2016

1. There was a board meeting on 7 January 2016. HSF and Lazard prepared a joint written advice to the Arrium board for that meeting. The advice recommended provision of the cash collateral sought by ANZ. It also recommended that Arrium seek to put in place an additional AUD200 - AUD250 million secured standby facility. In relation to the standby facility, the advice stated: 3 Liquidity monitoring … Given the next significant debt maturity is not for another 18 months, the primary focus of the Board should be upon carefully monitoring the projected liquidity of the Company and the Group particularly during the next several weeks when Arrium typically experiences a period of elevated outgoings and working capital funding requirements. … 4 Secured standby facility … Knowing that it has this additional AUD200-250m buffer of liquidity should therefore give the Board confidence in drawing down its unsecured lines in the interim should headroom in the existing facilities decline. It would be possible for a secured standby facility to be agreed and put in place now, but any decision by the Company as to whether to actually make drawings under the secured standby facility could be deferred to a later date having regard to progress with the strategic option review work, the overall liquidity position of the Company at the time and more specifically whether the existing unsecured facilities continue to provide sufficient liquidity. Establishing the secured standby facility would incur some costs and fees, but if it remained undrawn merely establishing the facility would not have the effect of subordinating existing creditors to new indebtedness.
2. At that meeting, the board resolved to approve the provision of approximately $61.7 million cash collateral to ANZ.
3. Included in the board papers was an 8 week liquidity forecast as at 4 January 2016, which included the following graph: Graph [156] (93527, pdf)
4. It is apparent from this graph that it was expected at that time that some debt would be repaid in March 2016.

Board meeting on 15 January 2016

1. There was a further board meeting on 15 January 2016. As was the case with the previous board meeting, included in the board papers was a liquidity update prepared by Mr Bakewell. The update included a graph in the form set out earlier in this judgment. The forecast indicated that net debt remained within the treasury policy liquidity buffer after allowing for the cash collateralisation of the ANZ facilities.
2. The minutes of the meeting record the following: The Board considered the liquidity update and, having regard to the legal advice from Herbert Smith Freehills tabled at the Board's 18 December 2015 meeting, NOTED that they considered that the Company continues to be able to pay its debts as they fall due.
3. The board papers also included an update dated 15 January 2016 prepared by UBS and Lazard on Project Columbus. The update noted: ● We continue to target the end of January / early February for binding bids ● Two bidders remain very active - namely Argand/Cerberus and Platinum Equity
4. The board papers also included a presentation dealing with progress made on "Project Lightning", which was a project to revise the mine plan in response to the fact that the "Iron ore price [had] fallen 30% since the start of October with some analysts expecting this environment to continue for some period of time". The introduction to that presentation observed that "As noted in the Project Lightning December Board update, the remaining mine plan opportunities are relatively small".

Ms Sparkes resigns as a director of Finance and AIOH

1. On 19 January 2016, Ms Sparkes sent to Mr Edler an email in which she said "As I am leaving next week, can you please proceed with the resignation of director from the subsidiary entities as at today". Mr Edler replied to that email on the same day saying "Ok, will get you a document soon for signing (probably Friday or Monday)". Mr Edler then forwarded Ms Sparkes' email to Ms Sara Goldstein and Ms Barbara Piccioli asking them to draft a notice of resignation for Ms Sparkes from all the companies of which she was a director effective 29 January 2016.
2. Although Ms Sparkes originally submitted that her resignation as a director took effect earlier than 29 January 2016, it seems plain from this material that her resignation as a director did not take effect until that date.

EY delivers draft paper on Project Jacaranda

1. EY delivered its draft Project Jacaranda report on 20 January 2016. That report considered liquidation of asset values and possible returns to Lenders and other creditors on a hypothetical forced liquidation scenario, forecasting total Lender recoveries on, stated assumptions, of between 26.1 percent and 43.2 percent, and much lower recoveries for non-lender creditors. The difference was explained by guarantees given to the Lenders which, in effect, gave the Lenders priority access to the proceeds of sale of the Mining Consumables businesses.

21 January 2016 board meeting

1. There was a board meeting on 21 January 2016. Included in the board papers was a monthly liquidity outlook model which, following recommendations from EY, included a cash flow forecast that covered a 13 week period. The model included the following liquidity headroom chart: Table [165] (85433, pdf)
2. Commenting on the model, Mr Bakewell said in a covering memorandum: The draft liquidity forecast indicates that over the 13 week period net debt remains within the Treasury Policy liquidity buffer after allowing for the cash collateralisation of the ANZ lines. In the latter weeks of the forecast, almost half of the liquidity reserve is in the form of trapped cash that has been deposited as collateral security for guarantee facilities. The liquidity forecast does not yet incorporate any Management actions / response to improve the liquidity position in the later weeks of the forecast, this work is ongoing. As an example of the opportunities available to make improvements it is worth noting that the draft liquidity outlook assumes the utilization of Prime receivables lines in the final 4 weeks is in the range of A$40m - A$60m vs. available lines of A$200m.
3. The minutes of the meeting record the following in relation to Mr Bakewell's liquidity update: The Board NOTED the memo from Robert Bakewell dated 19 January 2016 and the verbal update from Robert Bakewell regarding the forecast liquidity position of the Group; the key assumptions on which the forecast is based; that during the period of the 8 week forecast, the Company remains in compliance with the Company's Treasury policy, having at least $150m buffer between Net Debt and the Company's total committed non-current facilities; that if cash used to collateralise ANZ and BNPP guarantee lines is excluded, there are three days at the end of the 8 week period where the buffer is exceeded, but that there is work ongoing to further smooth the cash profile. The Board NOTED that, having considered the liquidity update and verbal update from Robert Bakewell, the Board considers that the Company continues to be able to pay its debts as they fall due. From then at least until the end of February 2016, the minutes of board meetings generally contained a statement to similar effect of the second paragraph.
4. Included with the board papers was a memorandum prepared by Mr Roberts which provided an update in relation to the Strategic Review. In relation to Project Marco, Mr Roberts summarised the expected results in these terms: Notwithstanding that savings targets have been increased slightly, Strategic Review financial modelling savings assumptions have not been changed, i.e. a realised savings level of $82m in FY16, a $155m run rate for end FY16 and the low end of the range for FY17 at $190m. Implementation costs included are $79m in FY16 and a total of $91m in total by 30 June 2017.
5. In relation to Project Lightning, Mr Roberts said: The Project Lightning paper presents two scenarios for the Mining business - ongoing operations based on Mine Plan 6 as presented to the Board on 15 January and mothballing of the operations effective 1 July 2016. The ongoing operations scenario has incorporates [sic] significant savings to the current Mining cost base, based on an assessment of reductions that can be made particularly in strategic contractor costs. Even after these savings, this scenario remains cash negative at current iron ore prices, with a cash outflow of $127m in FY17 at CRU price forecast assumptions, including $38m of Southern Iron restructuring costs and $69m reduction in creditors as a result of reduced activity. The mothballing scenario involves a more significant cash outflow of $361m in FY17 (excluding magnetite), including $207m in strategic contractor termination/fixed costs, including Southern Iron, and c$154m in creditor unwind. The optimal scenario for Mining will be dependent on the reductions in costs and termination payments that can be negotiated with Mining contractors. Further work is planned to develop negotiation strategies for both scenarios over the next two weeks.
6. Also included in the board papers was a paper prepared by UBS and Lazard providing an update in relation to Project Columbus and a paper prepared by Lazard providing a recapitalisation update.
7. The paper in relation to Project Columbus stated that two bidders (Argand/Cerberus and Platinum Equity) "remain very active in the process" and that three other bidders remained interested. According to Mr Bakewell, Mr Kleijn spoke to the report and said words to the effect of "We continue to be confident that the transaction is likely proceed [sic] at a price in the mid-range at a level acceptable to the Board".
8. The paper in relation to recapitalisation identified four options, which were described in the following terms: ■ Option A contemplates a high sale price for Columbus which is sufficient to repay all current debt and provide working capital funding for Marco. On the basis this is considered highly unlikely, it is not explored herein ■ Option B presents the scenarios arising from a lower price for Columbus and provides analysis of the facility structures the Board would need to have committed from the existing lenders to allow it to: ▪ Sell Columbus; or ▪ To operate Arrium without a Columbus sale. ▪ Both options include Marco forecast savings and are tested against the following scenarios: - Mothballing of the Whyalla Steelworks and magnetite operations - No mothballing ▪ Both scenarios assume that hematite operations continue, as per Mine Plan 6, with assumed savings ▪ The operational cashflows are consistent with those presented in the Arrium Business Plan update paper, with different assumed capital structures ■ Option C (recapitalisation through alternative capital providers) will be analysed and presented once we have updated indications of structure from Gamma and Kenobi (summary term sheets likely to be distributed at the board meeting) ■ Option D (voluntary administration) will be considered separately once current work is further progressed. It will be the "line in the sand" against which all options will be tested by stakeholders
9. The paper focussed on Option B in order "to stimulate a discussion on the strawman terms the Board would need to agree on the "ongoing facilities" for the company to have a sustainable capital structure in each scenario". It assumed that Arrium's net debt would be $2.58 billion "based on total drawn debt of A$2.63 billion as at 17 January 2016, less unrestricted cash of A$53 million" and "Columbus proceeds of US$1.1 billion (A$1.6 billion)". The paper defines a "sustainable capital structure" as: ▪ Net debt never rises above 5x EBITDA during the next four years; ▪ The business becomes at least cashflow positive over the forecast period; and, ▪ The leverage multiple in four years is 3x EBITDA or less (to ensure it is likely to be able to be refinanced) On that basis, Lazard concluded that: The resultant required haircut for existing lenders is indicatively: ▪ Sale of Columbus and no mothballing: 47% or $1,228m ▪ Sale of Columbus and mothballing: 40% or $1,053m ▪ No Columbus sale and no mothballing: 45% or $1,177m ▪ No Columbus sale and mothballing: 45% or $1,177m
10. Also included in the board papers was EY's report in relation to Project Jacaranda. That report indicated that Lenders could expect to recover: ● 26.1% of their debt in a "low" voluntary administration scenario; ● 33.8% of their debt in a "medium" voluntary administration scenario; ● 43.2% of their debt in a "high" voluntary administration scenario
11. Also included in the board papers was an update on the business plan. The executive summary noted that "Project Marco cost savings initiatives are progressing, with A$20m of cost savings achieved in December 2015 YTD, with A$87m expected to be achieved through FY16".
12. The update also included modelling of a number of scenarios "in order to stress test the current balance sheet, forecast liquidity and existing debt covenants of the Group in its current configuration and in combination with a number of strategic options". Two scenarios were based on the updated business plan (one involving a sale of Mining Consumables) and a further seven were based on the December 2015 "spot price inputs for steel and raw material and January 2016 iron ore spot pricing and FX inputs". Unsurprisingly, the modelling showed that "the impact of on [sic] December 2015 spot price inputs for steel and raw material and January 2016 iron ore spot pricing and FX inputs January 2016 spot prices is demonstrably negative primarily driven by Mining". The scenario based on the updated business plan summarised the position in the following table: Table [176] - text version (90185, pdf)

Meeting with Westpac on 29 January 2016

1. On 29 January 2016, representatives of Westpac (Mr Rodney Owen, Head of Corporate, Vic, & SA Credit Restructuring, and Mr Robert Casey, a Director in the same group) met with Mr Bakewell and Ms Pearce. That followed an earlier meeting on 12 January 2016 that Mr Owen and Mr Casey had had with Ms Sparkes. Mr Owen made some handwritten notes during the course of the meeting. According to the notes, the representatives from Westpac were told that there was a potential write down in the mining business "but not so large as to threaten covenant compliance". They were also told that "Covenant compliance 30/6/16 ok but tight", that in all there were six bidders for Mining Consumables, two of whom were active, one was "semi-active" and the remaining three were not active, and that Arrium expected letters of offer by 5 February 2016.

Meeting of the Audit and Compliance Committee on 3 February 2016

1. On 3 February 2016, members of Arrium's Audit and Compliance Committee (ACC), other Arrium board members, Arrium's auditors (Mr Tony Young from KPMG and others) and, for some items, representatives of HSF, met to consider a range of issues relevant to Arrium's 31 December 2015 half year financial statements (the HY16 Accounts), including impairment testing, whether the draft financial statements gave a true and fair view of Arrium's financial position as at 31 December 2015, and solvency and going concern status.
2. In the second half of January 2016, KPMG had raised the question whether some qualification should be included in the accounts concerning whether Arrium was a going concern. In its draft review report on HY16 Accounts dated 21 January 2016, which was included in the papers for the ACC meeting on 3 February 2016, KPMG stated: Our review work regarding this matter [that is, whether Arrium was a going concern] is in progress and we will provide a verbal update on status at the ACC meeting.
3. Arrium originally resisted the inclusion of any going concern qualification in the accounts. KPMG ultimately accepted that the accounts should be prepared on a going concern basis. However, they took the view that an emphasis of matter note on going concern should be included in the notes to the accounts. Arrium accepted that position. The minutes of the ACC record: The Committee NOTED the draft, unsigned memos from Robert Bakewell and Sarah Pearce dated 2 February 2016 and the verbal update from Robert Bakewell with respect to the solvency and going concern declaration and that an enhanced disclosure in Note 1 of the Accounts would provide further information, subject to the wording of that note being finalised over the coming weeks; and the accounts will appropriately be finalised on a going concern basis. The Committee NOTED the verbal update from Tony Young that KPMG agrees with the accounts being prepared on a going concern basis; and that the disclosure in Note 1 will be finalised with the Company on the basis of the outcomes of work being completed by the Company over the coming weeks in respect of impairment testing and other matters regarding the accounts as well as the progress of the Strategic Review to the date on which the accounts are finalised.

Board meeting on 4 February 2016

1. There was a board meeting on 4 February 2016. A joint paper prepared by UBS and Lazard was tabled at that meeting setting out details of the final bids from the two remaining bidders for Mining Consumables - Argand/Cerberus and Platinum Equity. The bids from Argand/Cerberus were in the range of USD825 million to USD1.1 billion. The higher bids were made on the assumption (suggested by UBS and Lazard) that "a higher level of leverage that could potentially be achieved via "rolling" a portion of the debt of Arrium's existing Lenders to support the acquisition".
2. In addition, included in the board papers was a memorandum dated 2 February 2016 setting out four "funding scenarios" that had been prepared in connection with Project Miwok. One scenario was based on the current business plan, which differed in only minor respects from the plan presented at the board meeting on 21 January 2016. It included the following summary of the cash flow position: Table [182] - text version (54977, pdf)
3. Scenario 2 was the Spot Plan. Scenario 3 was Spot + Whyalla Steelworks and Magnetite Mothballing and Hematite Mothballing from 1 July 2016. Scenario 4 was the same as Scenario 3, except it contemplated the "mothballing" of the Hematite business from 1 July 2018. The paper stated that: In conjunction with Lazard we have formed the position that the funding scenario that we will ask potential new lenders to looking [sic] solve for is: 1. Scenario 4, and the following sensitivities: 2. Iron ore price of US$35/t, and 3. Trade Creditor reduction (wind back) for Steel to 30 days and Mining to 45 days.
4. Also at the board meeting, the board considered a paper prepared by Mr Bakewell recommending the adoption of a consensus iron ore price estimate for the purpose of the assumptions used in Arrium's financial forecasts and impairment testing. The conclusion of the paper was as follows: There has been considerable volatility in recent iron ore pricing. Under the current market circumstances, management believes it is approprate [sic] to consider the generation of forecast and updated Business Plan cashflows based on two scenarios: 1. CRU forecasts 2. an average of forecasts from analysts and research experts. Given the recent and untested change to the underlying CRU methodology and CRU's own observation that their latest forecasts now have greater upside risk, management recommends the adoption of an average of analysts and research experts as the basis for the iron ore assumption incorporated in the forecasting process. In calculating this average, Management will give consideration to the timeliness of analyst forecasts and whether significant 'outlier' forecasts exist. Where such anomalies exist, management may exclude these specific forecasts from the average calculation. Management has consulted with Herbert Smith Freehills in relation to this paper and their feedback has been incorporated. That proposal was accepted by the board.
5. Included with the board papers was a paper prepared by Mr Bakewell dated 2 February 2016 setting out a liquidity forecast for the next 8 weeks. It is not necessary to set out the graph. Commenting on the graph, Mr Bakewell observed: The above forecast indicates that over the 8 week period net debt remains within the Treasury Policy liquidity buffer (broken green line). The net debt adjusted for cash collateral (pink line) crosses the non-current total available line adjusted for liquidity buffer (purple line) in the final 10 days of the forecast period, however is below the total available line adjusted for liquidity buffer (Current and non-current (red line)). The business with Treasury continues to focus on ways through working capital management to improve the liquidity position in week 8.
6. The memo also included a 13 week forecast prepared as at 15 January 2016. Commenting on that forecast, Mr Bakewell said: The above forecast indicates in the final week of the forecast period (week 15) that the forecast net debt goes over the Committed Funding lines post liquidity reserve ($150k treasury policy - Lighter blue line). The assumptions supporting the later weeks of the forecast we will reviewed [sic] and have historically been conservative. The business with Treasury continues to focus on ways through working capital management to improve the liquidity position across the forecast period. A revised 17 week model will be available week commencing 8 February after month end financial close is complete.

KPMG's letter in relation to going concern

1. On 8 February 2016, KPMG sent Mr Bakewell a draft letter in relation to going concern. The letter states: Given the current economic conditions facing the business, including commodity and materials prices, we noted that in our opinion, the company should expand the disclosure relating to "going concern" included in note 1 to the half year financial report. We are also of the opinion that there is evidence of material uncertainties relating to the company's ability to continue as a going concern. While you did not necessarily agree that this is the case, you asked us to respond, documenting the basis upon which we considered that there may be material uncertainties.
2. The letter then sets out details supporting KPMG's position. They include the following matters in relation to cash flow: ● For the 6 months to 31 December 2016 Arrium's operating cash outflow is $156m (net of $13m proceeds from early close out of interest rate swaps) and net investing cash outflow of $134m combine to negative cash outflow of $290m; ● Cash flow consumption has been funded by debt draw downs during the half year; ● Mining operations are currently generating significant cash outflows; ● Whyalla steelworks is currently generating significant cash outflows; ● Arrium is actively considering scenarios whereby Whyalla and/or the mining operations are mothballed. These scenarios involve significant short term cash outflows to achieve; … ● Ernst and Young has modelled cash flow forecasts over the next 15 weeks which show continued negative cash flows through the period and debt levels that reach $2.7bn by the end of March. The cash flow forecast implies that a negative variance may cause the need for the company to re-finance with the attendant risk that is discussed further below. KPMG also pointed to significant uncertainties including uncertainties around the sale of Mining Consumables, the fact that Arrium needed to negotiate amendments to existing debt arrangements which may involve negotiating that existing Lenders accept losses on balances currently owed by the company and the fact that two potential alternative Lenders had provided conditional indicative proposals to restructure existing debt which would require existing Lenders to accept a 45 percent and 50 percent respectively loss on existing loans. The letter concludes: Given the observations noted above, we consider that there is sufficient evidence of material uncertainties relating to the company's ability to continue as a going concern. We acknowledge Management's assessment that the half year financial report should be prepared under the going concern assumption. We are also of the view however, that there should be expanded disclosure relating to the uncertainties noted above included in Note 1 to the Half Year Financial report.

Mr Bakewell's alleged instruction on 8 February 2016

1. According to Ms Pearce, on or about 8 February 2016 she had a discussion with one of Mr Nestel, Mr Edler or Ms Naomi James, Head of Strategy, in which words to the following effect were said to her: Have you drawn down on the facilities? There have been discussions during the Board meeting to drawdown the remaining capacity on the all available facilities [sic]. Robert [Bakewell] should have told you." Ms Pearce replied that she hadn't. Later in her affidavit evidence, Ms Pearce suggests that the conversation was with Mr Nestel or Mr Edler. That evidence is consistent with evidence given by her in her public examinations. Mr Edler gave evidence that he had no recollection of the conversation. Mr Nestel did not give evidence. However, given subsequent events, it seems unlikely that the conversation was with him. It also seems unlikely that Mr Nestel would follow up on whether Ms Pearce had put into effect a proposal discussed at the board meeting.
2. Following the conversation, Ms Pearce sent an email to Mr Bakewell saying: I have not managed to get a hold of John [Nestel] or time in his diary (his PA said he is booked all day). Let me know if you have any luck. We will prepare drawdown notices in anticipation, noting HSBC and BBVA are subject to HK business days therefore not able to submit notice until Wednesday.
3. It appears that contact was made with Mr Nestel and a telephone conference call was organised for that evening between Ms Pearce, Mr Bakewell and Mr Nestel. Ms Pearce says that during that call Mr Bakewell said words to the following effect: We should drawdown on all available headroom for the remaining facilities.
4. Ms Pearce kept a handwritten file note of that discussion. The note is somewhat obscure. However, it does record the following: John and Robert 8/2/16 17.31 - Not enivetible [sic] we are giving a hair cut (amend & extend paper) - not in breach - no EOD [Event of Default] - point of drawing? Maintain liquidity, we will be entitled but they may refuse. - rollover - not honouring rollover would have to be supported by EOD.
5. Mr Bakewell says that he has no recollection of the conversation on 8 February 2016 or of instructing Ms Pearce to drawdown the remaining facilities. However, he says that he has no reason to doubt that he had a telephone call with Ms Pearce and Mr Nestel on 8 February 2016, although he says that he is certain that he never said that Arrium should drawdown all remaining funds "regardless of whether the Arrium borrowers were entitled to do so". Mr Bakewell also accepts that a decision was made to drawdown the remaining facilities and that it was unlikely that that decision was made by Ms Pearce.

Board meeting on 11 February 2016

1. The Arrium board met again on 11 February 2016.
2. The board papers included a liquidity update from Mr Bakewell dated 10 February 2016. The update only includes an 8 week forecast. The memorandum states that a draft updated 13 week forecast would be tabled at the board meeting. In the memorandum, Mr Bakewell states that the forecast assumes that "committed debt facilities are fully drawn from 15 February, with those drawings being held as cash on deposit and used to fund the on-going operations of the group". Commenting on the 8 week forecast, Mr Bakewell said: The above forecast indicates that over the 8 week period net debt remains within the Treasury Policy liquidity buffer (broken green line). The net debt adjusted for cash collateral (pink line) crosses the total available line adjusted for liquidity buffer (Current and non-current (red line)) over the final 2 weeks of the forecast period. The business with Treasury continues to focus on ways through working capital management to improve the liquidity position in weeks 7 and 8.
3. The papers also include a UBS/Lazard paper entitled "Project Columbus Status Update" which contained details of a revised bid for Mining Consumables submitted by Platinum Equity, which included a reduction in the total offer to USD1.05 billion but an increase in equity contribution.
4. Lazard also presented a recapitalisation update and Strategic Review option analysis. The paper identified three strategic options: ▪ The Gamma [GSO] and Kenobi [KKR] Recapitalisation proposals ▪ An 'amend and extend', with and without an assumed haircut ▪ A Columbus sale based on i) an updated Papa [Platinum Equity] proposal (delivered verbally at this stage) and ii) a Golf [Argand/Cerberus] all cash proposal
5. Three cases were considered for each option which were described in the following terms: 1. Debt Funding Scenario ▪ Whyalla and magnetite mothballing from July 2016 ▪ Hematite mothballing from July 2018 ▪ Spot commodity price forecasts 2. Debt Funding Downside Scenario ▪ As per Debt Funding Scenario for mothballing assumptions ▪ Mining Consumables EBITDA flat across forecast period ▪ Marco cost savings achieved at 70% rate 3. Equity Upside Scenario ▪ As per Debt Funding Scenario for mothballing assumptions ▪ Average of independent commodity forecasters for iron ore prices ▪ CRU forecasts for all other commodities
6. The analysis is detailed and somewhat complicated. Not all options were presented in detail. However, it is worth observing that, in the case of the amend and extend (no haircut) option on the basis of the debt funding scenario, there would be a shortfall in available liquidity in FY17 and a breach of existing covenants in FY17 and FY18. According to the analysis, in 2020 Arrium's gross debt to EBITDA would be 4.5x and its gearing would be 49 percent, which would make it difficult to refinance the debt at that time. However, that was not the case on the equity upside scenario.
7. In relation to the proposed note to be included in the half yearly accounts in relation to solvency, the minutes of the meeting record the following: The Board NOTED the tabled draft Basis of Preparation note 1 to the Half Year Financial Statements for the six months to 31 December 2015 and the verbal update from Robert Bakewell that the Company continues to prepare its accounts on the basis of a going concern that the note sets out the key matters of uncertainty considered regarding the basis of preparation of the accounts; and that he is comfortable with the disclosure and is clear about the nature of the risks facing the organisation; and the emphasis of matter included by the Auditor in the draft opinion for the Half Year accounts, and that it does not constitute a modified or qualified opinion.

Release of the HY16 results

1. The Arrium board met on 16 February 2016 and at 6.30 am on 17 February 2016, including to consider and sign off on the HY16 accounts ahead of the planned release of the accounts to the market on 17 February 2016.
2. Included in the board papers was a revised forecast for FY16 and a management estimate for FY17. The revised forecast was summarised in the following table: Table [202] - text version (71088, pdf)
3. The forecast included the following explanation of the differences: ■ Full Year Underlying EBITDA $122m unfavourable to November Forecast. ■ Mining Consumables $5m favourable due to AUD/USD assumption. ■ Steel $13m unfavourable. ▪ Steel Manufacturing $18m favourable, volumes favourable by $9m offset by $11m unfavourable margin due to Asian price pressure. Profit on sale of assets favourable by $14m ▪ Whyalla Steel $13m unfavourable, driven primarily by destocking/export slab shipment in H1 ▪ Distribution & Recycling $18m unfavourable, OSR recoveries $8m unfavourable, Recycling Non Ferrous $4m unfavourable, Property sales $5m unfavourable ■ Mining $137m unfavourable driven by Platts price (US$10/dmt unfavourable), cash costs and Pellet costs, partially offset by freight rates and FX. ■ Corporate $23m favourable driven by Project Marco benefits. ■ Full Year Operating cash outflow before tax of $186m is $260m unfavourable to November Forecast. ■ Cash Working Profits is $121m unfavourable driven by underlying EBITDA (primarily Mining) and $15m of additional non underlying costs (Project and restructure costs in Corporate). ■ Working capital cashflows are $81m unfavourable driven primarily by a decrease in cash initiatives of $68m primarily in Steel and $23m of non underlying cash outflows relating to Project and restructure. ■ Asset Sales are $63m unfavourable. ■ Net Debt at Jun 2016 of $2,166m is $354m unfavourable to November Forecast driven primarily by Operating cash outflow with an additional $93m due to FX revaluation of debt resulting from the change in AUD/USD rate (November Forecast rate 0.73, January Forecast rate 0.70).
4. The management estimate for FY17 was summarised in the following comparative table: Table [204] - text version (71341, pdf)
5. The board papers included a liquidity update dated 15 February 2016 from Mr Bakewell which included 8 and 13 week forecasts prepared as at 8 February 2016.
6. The commentary to the 8 week forecast stated: The above forecast indicates that over the 8 week period net debt remains within the Treasury Policy liquidity buffer (broken green line) except for the final day of the period, this is the peak position and progressively comes back into compliance by 29 April (refer 13 week model below). The net debt adjusted for cash collateral (pink line) crosses the total available line adjusted for liquidity buffer (Current and non-current (red line)). The business with Treasury continues to focus on ways through working capital management to improve the liquidity position in week 8.
7. At the meeting, there was also an update provided on Project Polo. On that subject, the minutes of the meeting record: The Board NOTED the verbal advice from Julia van Graas and David Hewish [the partners of EY working on Project Polo] that the initial work completed on the 13-week model shows that the Company has time to complete further work being undertaken as part of the Strategic Review and that the Company has sufficient liquidity over the forecast and that over that period the Company's scheduled payments are able to be paid in the ordinary course; that the model is fit for purpose, the numbers in the model are reasonable and what is to be expected; the key driver of liquidity will be the behaviour of the Company's trade creditors and lenders; that on a cumulative basis the actual cash result tends to provide a better result than the forecast; and that more granular information can be worked into the model if and to the extent it is required.
8. At the meeting on 17 February 2016, the board also approved the HY16 Accounts. The Accounts included the following balance sheet: [footnotes omitted] Table [208] - text version (76787, pdf)
9. The results were summarised in these terms in the results presentation: ■ Sales revenue $2,765 million, down 14% pcp [previous corresponding period] ■ Underlying EBITDA $115 million, down 39% pcp ■ Statutory EBITDA $40 million, up from $22 million loss pcp ■ Underlying NLAT [net loss after tax] $24 million, down 9% pcp ■ Statutory NLAT $236 million • Asset impairments $142 million • Mining $107 million - lower forecast iron ore prices • Recycling $37 million - lower forecast scrap prices • Restructuring, tax adjustments and other items $70 million ■ Statutory operating cash outflow $155 million, down from $93 million inflow pcp • Mining & Whyalla Steelworks operating cash outflow - $230 million • Southern Iron contractor exit costs $45 million • Restructuring costs $85 million • Adverse working capital movements - $150 million ■ Net debt $2,076 million, up from $1,750 end FY15 • Operating cash outflow $155 million • Capital expenditure $139 million • Adverse FX translation $37 million • Asset divestments $5 million ■ Mining and Whyalla Steelworks represent -$230 million of increase in net debt in 1H16 • Operating losses, capex, Southern Iron contractor break costs and unwind of mining creditors [footnote omitted]
10. Note 1 to the accounts included the following under the heading "Going Concern": The financial statements of Arrium Limited have been prepared on a going concern basis which contemplates the realisation of assets and the discharge of liabilities in the ordinary course of business. The Group has net assets of $2,328.4 million at 31 December 2015 which have decreased since 30 June 2015 as a result of operating losses of $235.4 million. The Group has positive net current assets as at 31 December 2015 of $727.6 million. The Group's net debt position (cash and cash equivalents less drawn debt facilities) is $2,075.9 million at 31 December 2015. This has increased from 30 June 2015 by $325.7 million. This is due to a number of factors including a weakening in the AUD:USD exchange rate (as the majority of debt is repayable in US dollars) and cash outflows arising from continued restructuring of operations. It is also due to decreased operating cash flows as a result of lower iron ore prices and continued challenging operating conditions for the Steel businesses. While the decline in the AUD:USD exchange rate increases net debt in Australian dollars it also increases the Australian value of the Group's US dollar denominated assets and income streams. In preparing the financial report, the Directors have made an assessment of the ability of the Group to continue as a going concern. The Group's ability to meet its ongoing operational and debt obligations requires the Group to achieve forecast cash flows including achieving cost savings from announced and planned restructuring activities in Steel and Mining. The Group has prepared detailed cash flow forecasts for the next 12 months, which incorporate continued actions to address going concern. The Group uses best estimate assumptions in the development of cash flow forecasts which include the use of independently sourced information for key assumptions. The Directors note, however, that some of the key assumptions underpinning the cash flow forecasts are inherently uncertain and subject to variation due to factors which are outside of the control of the Group. This includes iron ore prices, South East Asian steel prices, the AUD:USD exchange rate and demand for the Group's products. Key assumptions included in cash flow forecasts are an iron ore 62% Fe price of US$44 for H2FY16 and US$45 for FY17, AUD:USD foreign exchange rate of $0.70 for H2FY16 and $0.69 for FY17 and a recovery in steel margins over the forecast period. In the event that assumptions vary significantly from those forecast, the Group considers that it has options available to meet its obligations. These include divestment of significant businesses or assets and sourcing additional or alternate funding or terms from financiers. Arrium continues to progress its previously announced strategic review and debt reduction continues to be a key priority for the company. The Group is in compliance with its debt covenants at 31 December 2015 and based on the Group's estimates incorporating the key assumptions referred to above, is forecast to remain in compliance for the period of at least 12 months from signing of the Directors' report on the half year financial statements. Deterioration in forecast cash flows as a result of adverse variation in key assumptions noted above may adversely impact compliance with debt covenants and obligations over this period. There is a risk that the Group will not achieve forecast operating cash flows, realise sufficient cash proceeds from asset sales or not receive the ongoing support of financiers. These factors give rise to uncertainty which may be material, as to whether the Group will continue as a going concern and therefore whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report. Notwithstanding the uncertainties set out above, the Directors believe at the date of the signing of the financial report there are reasonable grounds to continue to consider that the going concern basis of preparation is appropriate.
11. KPMG included the following emphasis of matter note in its review report on the accounts: Without modifying our opinion expressed above, attention is drawn to the Directors assessment of going concern in Note 1 of the financial statements. The matters outlined in Note 1 indicate the existence of a material uncertainty that may cast doubt on the Group's ability to continue as a going concern, and therefore the Group may be unable to realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report.
12. Also included in the board papers was a presentation dated 16 February 2016 prepared by Lazard and UBS entitled "Review of Recapitalisation Strategic Options". The presentation observes that "Gamma" (GSO) had been in Sydney since Saturday to advance due diligence and negotiate term sheets and that discussions were ongoing. It pointed out that two options were currently being considered. "Plan A" involved an agreement with Gamma in relation to a framework for recapitalisation of the company which would be subject to a number of conditions precedent including obtaining lender approval and Gamma completing satisfactory due diligence. As part of the arrangement, Gamma would provide an interim liquidity facility. "Plan B" involved continuing to work with Gamma (and others) to secure an agreement in relation to recapitalisation. The presentation observed that negotiations with KKR "have not resulted in a viable commercial proposal".
13. The paper considered five options. Those options and Lazard and UBS's comments on them are summarised in the following table, which formed part of the presentation: Table [213] text version (88301, pdf)
14. Of the two options considered further the advisers preferred, on balance, entry into a recapitalisation agreement with GSO.
15. In a memorandum dated 15 February 2016 to the board, Mr Roberts states: At this stage, and subject to being able to agree acceptable terms with Gamma, I anticipate my recommendation to the Board will be that the best option for the company to pursue is the Gamma Recapitalisation Plan with the interim facility. Key reasons underpinning this view are: ● It is the only option available to the Company which provides a "solution" to the current financial position and performance of the Company and which in turn can provide confidence to our customers, employees and suppliers regarding the viability of the Company. ● It addresses the short term liquidity risk of the Group, through the interim facility, and provides longer term liquidity which will enable the Company to address its loss-making businesses and deliver a viable and sustainable balance sheet position for the Company moving forward. ● It enables the Company to put an option to lenders which gives them a choice to exit their exposure to the Group if they wish, while retaining the ability to reject that option if their preference is to work through the debt position with the Company.

HSBC refuses to fund Drawdown Notice

1. On or about 16 February 2016, HSBC refused to fund a Drawdown Notice issued by Arrium on 11 February 2016 and signed by Ms Hall and Ms Verawati. Following that refusal, Mr Bakewell and Mr Anthony Brooks, the Group Financial Controller, signed a document stating: In line with drawdown notice issued 10/2/16 the representations and warranties in the facility agreement which are required to be repeated under clause 14.2 are true as though they had been made at the date of drawdown date specified in the notice (16/2/16) in respect of the subsisting facts and circumstances.
2. That document was sent to HSBC. However, the funds were not advanced, and no claim is made in respect of the document signed by Mr Bakewell and Mr Brooks. The Drawdown Notice was not pursued following entry into an agreement with GSO.

WBC's initial response to release of results

1. Arrium released its half year financial results to the ASX on 17 February 2016.
2. Following the announcement Mr Owen prepared an update on Arrium. The update relevantly said under the heading "The way forward" the following: ● We now expect an engagement with Arrium will take place, with a view to exploring potential restructures of the debt load, including but not limited to negotiating the re-finance of the July 2017 maturing tranches which will otherwise become "current" in the 30 June 2016 accounts. The timeframe for this negotiation will run up to 30 June 2016 and the negotiations are expected to cover areas discussed last year (ie provision of security, covenant settings, amortisation, asset disposals etc). ● Arrium have referred to other capital proposals and opportunities for asset disposals within the results presentation but no details have yet been provided. ● To assist lenders, Arrium have indicated that they will fund the appointment of a lenders' adviser, on terms to be negotiated. They have presented the lenders with a choice of three firms, two of which we had recommended to Arrium's CFO. The lenders are expected to vote on the appointment. ● Based on our own estimates, at 31 December Arrium had cash + facility headroom available totalling some A$650m. The facility headroom appears to have been very largely drawn in the past few weeks. Net operating cash outflow, including capex, in 1H FY16 was some $290m so on a very rough analysis, the borrower has sufficient liquidity to maintain trading operations for at least 12 months. 1H cash outflow was entirely funded by increased borrowings.

Board meeting on 20 February 2016

1. There was a board meeting on 20 February 2016. Included in the board papers for that meeting was a memorandum dated 20 February 2016 prepared by Mr Bakewell in relation to solvency. The memorandum relevantly said: The company remains able to make creditor payments as and when they fall due. To the extent that there have been changes in supplier terms these have been managed in consultation with suppliers and are able to be met with existing liquidity. The latest cash forecast indicates that the company will comply with the company headroom requirement of the Treasury policy, however Net debt position adjusted for cash on deposit held as collateral to support bank guarantees is forecast to be in excess of the policy threshold from weeks 7-13 of the forecast period. Forecast assumptions in the later weeks of the forecast period are historically conservative and working capital management response would be utilised to manage the liquidity position. The forecast net debt position adjusted for the cash collateral still provides liquidity headroom. The management forecast and estimate includes the significant supplier term changes and indicates positive cash flow and sufficient liquidity for at least the next 12 months, assuming no material further shortening of supplier payment terms. [footnote omitted]
2. Also included in the board papers was a presentation prepared by Lazard and UBS providing an update in relation to negotiations with GSO. The paper "on balance" supported the proposal to enter into a recapitalisation deed with GSO and provided a detailed analysis of the financial implications of the proposed deed. Also included in the board papers was a summary of the proposed deed prepared by HSF.
3. In a memorandum to the board dated 20 February 2016, Mr Roberts summarised the effect of the recapitalisation deed in the following terms: ● The provision by GSO of a senior debt facility of US$665M (A$924M) ● A renounceable rights issue to raise US$262M (A$364M), which will be fully underwritten by GSO or another underwriter appointed by the Company ● The proceeds from the senior debt facility and the rights issue being used to repay the Company's existing bank and USPP debt at less than par value ● The Company obtaining a secured working capital facility of A$500M to fund working capital requirements and future restructuring costs ● The issue of warrants to GSO with an exercise price equal to the rights issue price in respect of 15% of the Company's post-rights issue diluted issued share capital. The Recapitalisation Deed to be signed at this point in time is in effect a process agreement covering the next six weeks to 5 April 2016, and attaches detailed term sheets for each of the above elements of the Recapitalisation. During the period from now until 5 April 2016, GSO will complete their due diligence and obtain Investment Committee approval to proceed and we will negotiate the definitive agreements consistent with the term sheets. The process to seek lender approval for the Recapitalisation will also commence. During this time there will be an exclusivity regime and work fee (A$10M) and cost arrangements in place which are described in detail in the HSF summary attached to this paper. At the same time that the Recapitalisation Deed is signed, an Interim Facility for US$140M (A$194M) will be signed from which point it is committed. This is described in more detailed [sic] in the separate Board paper from Robert Bakewell. [footnote omitted]
4. In a memorandum to the board dated 20 February 2016, Mr Bakewell gave the following explanation for the interim secured debt facility: Based on the 13 week forecast provided to the Board 16 February liquidity headroom reduces to A$60.6m (below our liquidity buffer adjusted for cash held as collateral). This forecast does not anticipate any potential decline in creditor terms nor does it include any management actions that would be taken in response and assumes the business performs to forecast. The Facility provides additional liquidity to mitigate any potential liquidity events and it is prudent to put in place as a standby short term liquidity facility.
5. At the meeting, it was resolved that authority be delegated to a subcommittee to finalise negotiations with GSO and to finalise and approve the final terms of a recapitalisation deed.

Arrium enters recapitalisation deed with GSO

1. On 22 February 2016, Arrium entered into the recapitalisation deed and interim facility agreement under which, independently of the recapitalisation deed, GSO agreed to provide Arrium with a senior secured interim facility of USD140 million (approximately $200 million). On the same day, the GSO recapitalisation proposal was announced to the market and Lenders.

Reaction of the banks to the recapitalisation deed

1. At some stage in February 2016, McGrathNicol were appointed (at Arrium's expense) to advise the Lenders regarding exploration of options available, including the GSO recapitalisation proposal.
2. On 24 February 2016, King & Wood Mallesons (KWM) sent a letter to HSF on behalf of the syndicated and bilateral Lenders: 1. Reserving their clients' rights in respect of Arrium's announcements of both its 31 December 2015 half year results on 17 February 2016 and the GSO recapitalisation proposal announced on 22 February 2016; 2. Advising that those Lenders were considering whether events of default had occurred under their respective facility agreements.
3. On 29 February 2016, Arrium gave a confidential presentation to various representatives of the Lenders. The presentation was given by Mr Roberts and Mr Bakewell with Mr Edwards (Lazard), Mr Nestel (HSF) and Mr Barry (UBS) also present to answer questions from Lenders. The presentation gave an overview of the history of the Strategic Review, including a detailed account of the Mining Consumables sales process and its outcome and the GSO recapitalisation proposal. It also included forecasts for the balance of FY16 and the following four financial years.
4. On 4 March 2016, HSBC sent a letter to OneSteel Recycling Hong Kong Limited withdrawing certain facilities provided by the bank to that company and demanding repayment in full of all outstanding debts.
5. On 8 March 2016, Lenders were presented with a final version of EY's Project Jacaranda model.
6. On 15 March 2016, Mr Roberts, together with representatives of HSF, Lazard and UBS attended a meeting with representatives of McGrathNicol, KWM and advisers to the noteholders. The meeting was requested by the advisers to the Lenders and noteholders to provide informal feedback on the GSO proposal. The agenda for the meeting states: The lenders and noteholders are still considering their position in relation to the GSO Plan and the advisers do not at this stage have formal or confirmed instructions in relation to it.

Mr Bakewell resigns as CFO

1. On 18 March 2016, Mr Bakewell resigned as CFO of Arrium.

Board meeting on 18 March 2016

1. There was a meeting of the Arrium board on 18 March 2016 by telephone. Included in the papers for the board meeting was a memorandum dated 17 March 2016 from Mr Bakewell which provided an update on the forecast liquidity position of the group. Included in the memorandum is a graph setting out the 8 week forecast. Commenting on that graph, Mr Roberts said: The first GSO drawdown notice for US$50m was issued 3 March and will be funded 17 March. The forecast indicates that over the 8 week period net debt remains in compliance with the Treasury Policy liquidity buffer (broken green line remains below solid red line. The net debt adjusted for cash collateral (pink line remains below solid red line)) stays in compliance with Treasury Policy liquidity buffer with the exception of 2 days from 20 April to 21 April as well as after 5th May. The Divisions together with Treasury continue to focus on ways through working capital management to improve the liquidity position with a particular focus on the forecast outgoings during March. All payments being reviewed and daily calls being held between CEO/MD, CFO, treasury and GMC's and CE's to discuss cash sources and uses approach. US$13m drawdown on the HSBC Bilateral remains unfunded.
2. Also included in the board papers was a report from HSF on the meeting on 15 March 2016. The reported stated, among other things, that the advisers to the banks had indicated that: (1) the Financier Group recognises that a restructuring of the Arrium group is necessary and desirable (especially in light of the information received on the outcome of the Columbus process and its liquidity position); (2) the Financier Group do not want to go down a path that leads to the insolvency of the group and accordingly the Financier Group are supportive of a process that leads to a solvent restructuring of the group (potentially including options that include an amend & extend of the existing financier debt and no immediate cash pay down); (3) the Financier Group wish to support such a restructuring process by putting in place a 'safe environment' for the group to work through such restructuring, including specifically: • the Financier Group would be willing to put in place a standstill in order to provide the group with sufficient time to run a further market process, and to assess, negotiate and implement an alternative recapitalisation resulting from that process; • the Financier Group would like to replace the GSO Interim Facility with a replacement facility in the same principal amount as the GSO Interim Facility but at a cheaper rate (and would consider providing further interim secured funding in future if the group demonstrated a need for additional funds to fund the liquidity needs of the group through the alternative recapitalisation process); and (4) the Financier Advisers would be in a position to circulate term sheets in respect of the proposed standstill and replacement interim facility within approximately 48 hours of the 15 March Meeting.
3. The minutes of the board meeting record Mr Edwards as reporting: ● Peter Anderson of McGrath Nicol has approached the Company's advisers, indicating that the Company's lenders: ○ do not want the company to go into administration, that they recognize the value destruction in an administration, and that they do want management to continue to operate the company. ○ are prepared to enter into a "support agreement" which would include a standstill on lenders exercising rights, such as might arise in the context of a future covenant breach, and that the lenders are expecting to provide a term sheet to the Company for this arrangement shortly; ○ are prepared to provide or takeover an interim secured facility on terms no less favourable to the company than the GSO facility and potentially at lower cost and for an amount of no less than US$140 million, which is an amount that covers the Company's current forecast liquidity needs; ○ are prepared to consider requests to provide additional liquidity beyond that interim facility limit based on need - but their view of the company's liquidity is that there is no such current need; The minutes also record that the Lenders were not minded to accept the current GSO proposal, that they would like to reopen the Strategic Review and that they realised "that standstill and interim funding would be needed to be available to support the Company throughout this process".
4. Shortly after the board meeting, McGrathNicol provided Arrium with draft documents setting out the Lenders' proposal.

Mr Roberts' letter dated 23 March 2016

1. On 23 March 2016, Mr Roberts wrote to Mr Peter Anderson, the Executive Chairman of McGrathNicol in relation to the GSO proposal. The purpose of the letter was stated to be to set out the possible consequences of rejecting the proposal. In that context, Mr Roberts said: During the period of the strategic review, the company's lenders have taken a range of actions to withdraw existing facilities from the Group which have placed significant pressure on the company's liquidity position. These actions have included: ● the withdrawal of A$770m in uncommitted facilities and receivables purchase arrangements since announcing the strategic review: o 1 July to 31 December 2015: A$350m o 1 January to 17 February 2016: A$155m o 17 February 2016 to date: A$266m ● requiring the company to plan for the migration of its transactional facilities to another bank without any certainty regarding support through the transition; ● requiring cash collateralisation of bank guarantee and letter of credit lines in an amount totalling A$74m in aggregate; and ● withdrawing FX, commodity and trade hedging facilities which the company requires to operate its business in the ordinary course and manage risk. These actions have required the company to increase its level of drawings under its committed bank facilities and, most recently, have resulted in the company needing to draw on the secured interim facility put in place with GSO.
2. The letter set out a number of objections to the proposal contained in the documents provided by McGrathNicol. Those objections included the following: 1. The proposal required Arrium to terminate the GSO proposal without any agreed alternative; 2. The proposal required Arrium to grant security over all of its assets for a loan of USD140 million; 3. The proposal contemplated a process of in excess of six months to be undertaken which would give priority to the Lenders over other creditors; 4. The proposal required Arrium to acknowledge that a number of Potential Events of Default had occurred and contained no protection for Arrium in the event that there were any covenant breaches or defaults in the future; 5. Neither Morgan Stanley nor the noteholders agreed with the proposal.

KWM's letter dated 29 March 2016

1. On 29 March 2016, KWM wrote to HSF. The letter indicated that the Lenders were likely to reject the GSO proposal and set out their reasons for doing so, not least of which the fact that the Lenders regarded the proposed debt compromise as "completely unacceptable". The letter proposed that Arrium terminate the GSO recapitalisation deal and that the terms of a standstill agreement be finalised. During the standstill period it was envisaged that: 1. The Lenders and Arrium would negotiate amendments to the terms of the syndicated facilities and the relevant bilateral facilities to extend tenor and vary payment terms; 2. Arrium would commence a recapitalisation bid process; 3. The GSO standby facility would be replaced with a lender-provided secured replacement facility with further lines made available to the group in the future to support trading and restructuring activities (subject to credit approval).

Banks lose confidence in Arrium board; Arrium goes into voluntary administration

1. On 1 April 2016, a meeting was held between representatives of Arrium and representatives of Westpac and CBA. Following that meeting, NAB, acting on behalf of syndicated and bilateral Lenders (excluding Morgan Stanley), advised Arrium that those Lenders had rejected the GSO recapitalisation proposal and had "lost confidence" in Arrium's management.
2. There were further discussions between representatives of Arrium and representatives of the Lenders. However, those discussions were unfruitful. On 7 April 2016, Arrium's available directors resolved that: ● the Company is insolvent or likely to become insolvent at some future time; and ● administrators should be appointed to the Company, pursuant to section 436A of the Corporations Act 2001 (Cth).
3. The Board also resolved to appoint partners of Grant Thornton as the administrators. Those administrators were replaced by partners from Korda Mentha. Subsequently, 94 Arrium Group entities entered into inter-related deeds of company arrangement to facilitate the distribution of the group's assets. The Arrium Entities went into liquidation on 20 June 2019. At the time the voluntary administrators were appointed, Arrium held a total of $295 million in cash. The administrators sold Mining Consumables on 4 November 2016 for USD1.23 billion.

The nature of the case

1. It is convenient to address first the question whether there was a breach of the representations and warranties contained in the facility agreements and repeated in the Drawdown Notices, and to deal first with the representation concerning solvency.
2. The representation concerning solvency was to the effect that Arrium and each of its subsidiaries was solvent at the date of the agreement and that at each Drawdown Date it would continue to be able to pay all its debts as and when they became due and payable. The representation was repeated on each Drawdown Date by the terms of the facility agreement. It was also repeated by virtue of the representation in each Drawdown Notice, which stated that the representations "which are required to be repeated under [the facility agreement] are true as though they had been made at the date of this Drawdown Notice and the Drawdown Date specified above in respect of the facts and circumstances then subsisting". In substance, that raises the question whether any of the relevant Arrium Entities was insolvent between 7 January 2016 (when the first impugned Drawdown Notice was issued) and 16 February 2016 (when the last drawdown was advanced).
3. The BOC Plaintiffs also rely on the representation contained in the facility agreements to the effect that no Event of Default was subsisting at the date of the relevant Drawdown Notice or at the relevant Drawdown Date and that one of the Events of Default was an "Insolvency Event" within the meaning of the facility agreements. However, this claim adds nothing to the representation concerning solvency. For that reason, nothing more needs to be said about it.
4. It is common ground that the BOC Plaintiffs bear the onus of proof on the issue of solvency, that the question of solvency should be determined at a group level (because of cross-guarantees between companies in the Arrium group and inter-company loans between companies in the group) and that the test of insolvency for the purposes of the relevant facility agreements is the test adopted by the Corporations Act, which provides in s 95A that: (1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. (2) A person who is not solvent is insolvent.
5. Before dealing with the relevant legal principles governing the test stated in s 95A, it is necessary to say something about how the BOC Plaintiffs' put their case on solvency.
6. As their claim stood before 3 March 2021, the BOC Plaintiffs alleged that the Arrium Group was insolvent by no later than 7 February 2016 because by that date it had no means of repaying the debt totalling approximately $871 million which would mature on or about 10 July 2017. In substance, that was said to be so because of the group's deteriorating financial position and because of the following matters: 1. There was no reasonable basis to expect that the group could refinance the Maturing Debt; 2. The group could not repay the Maturing Debt from operating profits; 3. There was no reasonable basis to expect that Arrium could undertake a successful capital raising; 4. Having regard to those matters, the only way Arrium would be able to repay the Maturing Debt was through the sale of Mining Consumables; 5. It was apparent by 7 January 2016 that the group would not receive a sufficient price for Mining Consumables to enable it to repay the Maturing Debt and to have enough cash left over from the sale to enable it to continue as a viable business.
7. Although particularised somewhat differently, that claim mirrored the insolvent trading case brought by the liquidators. Indeed, the BOC Plaintiffs filed no expert evidence in relation to the question of solvency and, like the liquidators, chose to rely on lengthy affidavit evidence given by Mr Martin Madden, one of the liquidators, who expressed opinions on the question of solvency.
8. On 19 February 2021, the liquidators filed a notice of motion seeking to amend their claim in a number of respects including by amending their particulars of insolvency. The motion was heard on the third day of the hearing. Relevantly, the liquidators sought to amend their particulars by alleging that the Arrium group had a limited time in which to find a solution to its debt problems. The BOC Plaintiffs filed a parallel motion seeking to make similar amendments. The principal amendment sought to be made to the list statement filed in the BOC Proceeding was to include the following paragraph in the particulars of insolvency: 8A. As at 31 December 2015, and at the time of each Relevant Drawdown Notice, the commercial reality was that Arrium Group had a limited period of time to find a solution enabling it to repay the July 2017 Maturities and other expected liabilities, or reach some form of compromise with existing lenders in respect of those debts, including by reason of the matters set out in paragraph 7A above, and in circumstances where: 8A1. the strategic review had been on foot since June 2015; 8A.2 it was highly likely that the Arrium Group would make an announcement by no later than February 2016 about the progress of the strategic review; 8A.3 the expectation of shareholders, trade creditors and existing lenders of the Arrium Group was that there would be an announcement as regards the strategic review by the time the results for 1H16 were released in February 2016; 8A.4 it was likely that the poor financial performance of the Arrium Group and other disclosures to be reported in its 1H16 financial report would be of concern to shareholders, trade creditors and existing lenders; 8A.5 in the premises, there was a significant risk that following announcements to be made by the Arrium Group in February 2016 about the progress of the strategic review and the 1H16 Financial Report: 8A.5(i) Arrium's shareholders, trade creditors, existing lenders and other stakeholders would become increasingly uncertain as to the ongoing viability of the Arrium Group; 8A.5(ii) the Arrium Group's trade creditors would further contract their terms of trade; 8A.5(iii) existing lenders would further withdraw uncommitted finance facilities and refuse to honour drawdown requests under existing agreements; 8A.5(iv) the Arrium Group would face greater liquidity pressure; 8A.5(v) the Arrium Group would be at greater risk of breaching financial covenants under the Existing Finance Agreements; 8A.6 the July 2017 Maturities would become current liabilities for financial reporting purposes after 30 June 2016.
9. That amendment was initially opposed by the defendants on the basis that it arguably raised a new and important factual allegation - namely, that Arrium would run out of cash before July 2016. Although the amendment does not make that allegation specifically, an earlier version of the amendment did. That version was abandoned in the face of correspondence from the defendants' solicitors objecting to it. Mr Williams SC, who appeared for Ms Sparkes and who took the primary running of the defendants' opposition to the amendment application, submitted that the reformulated amendment suffered from the same flaw as the original proposed amendment - that is, it introduced an important new factual allegation at a very late stage in the proceedings. Mr Borsky QC, who appeared for the liquidators at the time and who was principally responsible for advancing the amendment application, rejected that interpretation of the amendment. During the course of argument, I summarised what I understood to be the plaintiffs' case in these terms: Well, that's not the way I understood the case to be opened, and I would not permit that case to be run. … what's critical, as I understand it on the plaintiffs' case, is that there was this limited window in which these future debts were to be addressed, and there was that limited window because the financial position of the company was deteriorating over that time, but not reaching the point where some other debt was going to arise during that time that couldn't be paid during that time.
10. A little later, Mr Borsky said: Your Honour, I can clear up, I hope, the limited window point. First, may I respectfully say that the way your Honour has recapitulated to our learned friend our case as opened is accurate and understood; that's the case we opened and that's the case we seek to run.
11. Mr Collinson QC, who appeared for the BOC Plaintiffs, had previously said that his clients adopted Mr Borsky's submissions. Mr Collison did not seek to advance a different case on insolvency from the one advanced by Mr Borsky. It was on that basis that I permitted the amendment.
12. Understood in that way, the BOC Plaintiffs' case on insolvency is narrow and atypical. The case is that Arrium was insolvent from 7 January 2016 because from at least that date it could not pay its banking facilities maturing in July 2017. It is not part of the BOC Plaintiffs' pleaded case that Arrium was insolvent because it could not pay other debts that became due before July 2017, although the BOC Plaintiffs do allege that Arrium's diminishing liquidity position somehow or another affected its ability to deal with the facilities falling due at that time. It will be necessary to return to how that allegation is put later in this judgment.

Relevant legal principles

1. The question whether a company can pay its debts as and when they become due is a question of fact that involves a realistic commercial assessment of the company's financial position as a whole. As Barwick CJ explained in Sandell v Porter (1966) 115 CLR 666 at 670-1: The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due. See also Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621 at [54] per Palmer J, cited with approval in Australian Securities and Investments Commission v Plymin (2003) 175 FLR 124 at [378] per Mandie J; Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 39 WAR 1; [2008] WASC 239 at [1090] per Owen J.
2. The BOC Plaintiffs identify four principles which are said to emerge from the cases and to have particular relevance in this context.
3. First, the fact of insolvency must be proved on the ordinary civil standard - that is, on the balance of probabilities: Evidence Act 1995 (NSW) s 140; Bell at [1097]; Octaviar Public Trustee (Qld) v Octaviar Ltd (2009) 73 ACSR 139; [2009] QSC 202 at [134] per McMurdo J.
4. Second, a debt is taken to be owing at the time stipulated for payment in the contract unless there is evidence proving to the Court's satisfaction that there has been an express or implied agreement between the company and the creditor for an extension of time, or that some estoppel applies or there is evidence of an imminent compromise between the creditor and the debtor. As McMurdo J explained in Octaviar (at [134]): The possibility of an alteration to the amount of a debt or to the due date for its payment is relevant to that question [the question whether the Octaviar group was able to pay its debts as and when they became due]. But a mere theoretical possibility of a compromise of that kind would not preclude a finding of insolvency, for otherwise such a finding, to be based upon an inability to pay debts not yet due, could almost never be made. On the other hand, the circumstances at the relevant date might be such that to overlook an imminent compromise would be to ignore the "commercial reality" of the company's position. It is for the party asserting that a company's contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence: Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621 at 54 per Palmer J.
5. Third, the test of insolvency is future looking. Consequently, the question is not simply whether the company can pay debts falling due at or around the date the question arises but whether, as at that date, it can pay debts falling due in the future. As McMurdo J explained in Octaviar at [134]: The case that the group was insolvent is not that there were debts already due on 22 January 2008 which could not then be paid. It is that debts would not be able to be paid when the due date for payment was reached. That exercise in prediction involves some uncertainty and speculation. But it is a question to be answered upon the balance of probabilities: as at 24 January 2008, was it more probable than not that the group was unable to pay its debts as they became due?
6. How far into the future the Court should look is a question to be answered having regard to the particular facts of the case. Normally, a court will not look too far into the future because there are so many unknowns and contingencies, but sometimes it may be appropriate to do so. As Jackson J explained in Re Cube Footware Pty Ltd [2013] 2 Qd R 501; [2012] QSC 398: [52] Although there is no particular magic in any specific period of time into the future against which solvency is to be assessed, it will often be more difficult to reach a factual conclusion as to whether a company is able to pay its debts as and when they become due and payable if it is necessary to have regard to a future period of years rather than a few months. Common sense dictates that a court should avoid speculation. Some of the older cases reflect a great reluctance to look forward much at all. Other cases show that at times it both can be done and should be done. … [54] … there are cases where courts have looked years into the future in assessing a company's present solvency. Some of the cases concern insurance companies which were held to be insolvent because they had contingent or prospective liabilities from a long tail of present and future claims and did not have the assets to meet those liabilities in future, even though they could presently meet current liabilities. Another case concerned a company that had borrowed from a related company. The borrower had no real prospect of repaying the debt which would become due after two and a half years. [footnotes omitted] See also Bell at [1128].
7. One case where the court was prepared to look years into the future is Insurance Commissioner v Associated Dominions Assurance Society Proprietary Limited (1953) 89 CLR 78. That case involved an application filed in May 1953 by the Insurance Commissioner to wind-up a life insurance company on the ground of insolvency, which was brought in the original jurisdiction of the High Court and heard by Fullagar J sitting alone. After examining the financial position and prospects of the company, his Honour concluded that it was apparent that, although the company would be able to pay policyholders who made claims for the next several years it was apparent that at some stage it would not be able to continue to do so. In reaching that conclusion, Fullagar J said (at 110-1), in a passage that took on some significance in this case: The making of a decision is a matter which must inevitably be attended with some anxiety. The primary question of solvency is not such a clear-cut question as it normally is in the case of an ordinary commercial undertaking. The standard accepted by actuaries is in some degree artificial, and in some degree elastic. I cannot overlook the necessity for caution … The central and outstanding fact in the whole case appears to me to be that the company is insolvent. I regard this as quite clearly established. The company is insolvent not merely in a technical sense but in a practical and commercial sense, not merely in slight degree but in very serious and substantial degree. This does not mean that it is unable at the moment to pay its debts as they fall due. It could, so far as the evidence goes, discharge its current liabilities tomorrow, and it will for some time to come be able to pay its policy holders in full as and when their claims mature. But it is highly probable -practically certain, I think, as matters stand - that it will in the not very distant future be unable to discharge in full claims under maturing policies. When that event will occur cannot in the nature of things, be precisely stated. I did not understand it to be suggested that it was likely to occur before 1960. That being the position of the company, there is, in my opinion, a high degree of probability that, if it is not placed in liquidation, policy holders whose claims mature in the near future will be paid in full at the expense of those whose claims mature in the more distant future.
8. Fourth, although the question of solvency is to be determined by reference to the circumstances as they were known or ought to be known at the date at which the question of solvency is assessed and not in hindsight, the Court can have regard to what actually happened to the extent that what actually happened sheds light on what was likely at the time when the question of solvency is to be assessed. So, for example, in Lewis v Doran (2004) 208 ALR 385; [2004] NSWSC 608 Palmer J had regard to the fact that the debtor in that case had, for slightly more than three years after the time it was said to be insolvent, continued to pay its debts as they fell due. In that case, the fact that it did so was evidence "that the funds of the other companies in the group were a resource available to [the company] as a matter of commercial reality" (at [118]). That reasoning was referred to with approval on appeal: see Lewis v Doran (2009) 219 ALR 555; [2005] NSWCA 243 at [95] per Giles JA (with whom Hodgson and McColl JJA agreed). After referring to these decisions, Owen J in Bell summarised the position in the following terms (at [1117]): Consequently, the court can apply its knowledge of post-event facts to determine whether the proffered expectations of the parties (the commercial realities with regard to cash flow) were or were not realistic. From there, the court can make an assessment of the company's ability to pay. But the trier of fact cannot simply look at the facts in hindsight, determine the value of a particular asset or liability which could not have been anticipated at the time, and, without more, include that amount in a cash flow analysis.
9. None of the principles on which the BOC Plaintiffs rely is controversial, particularly in the context in which they were stated. However, the BOC Plaintiffs seek to derive two principles from them which are controversial.
10. First, according to the BOC Plaintiffs, the requirement that they prove that Arrium was insolvent on the balance of probabilities means that "a company will also be insolvent if it can be said, on the balance of probabilities, that the company is not able to repay a debt falling due on some future date". In stating the test in those terms, the BOC Plaintiffs take issue with the written advice given by HSF to the Arrium board on 18 December 2015 in which HSF, adopting some of the language used by Fullagar J in Insurance Commissioner v Associated Dominions Assurance Society Proprietary Limited (1953) 89 CLR 78, said: It is not the case that a company is insolvent merely because it cannot say with certainty whether or how it will repay or otherwise deal with a debt due at some distance in the future. A company will be insolvent now if it can be said with certainty, or practical certainty, that there is no way it will be able to deal with a debt falling due at some future date. According to the BOC Plaintiffs, in stating the test in that way, HSF substituted a test of certainty or practical certainty for the civil standard of satisfaction on the balance of probabilities.
11. In my opinion, that criticism of the HSF advice is misplaced and confuses two things. One is the standard of proof to be applied to the question whether from a particular date (that is, from 7 January 2016) Arrium was unable to pay its debts as they became due. That question is one of fact, not likelihood. The civil standard requires the Court to be "satisfied that the case has been proved on the balance of probabilities" (to quote from s 140 of the Evidence Act). That is, the civil standard is concerned with the degree of satisfaction the Court must have that the facts essential to the finding of liability have been made out - in this case, that as and from 7 January 2016 Arrium was unable to pay its debts (including future debts) as they became due. To put the point another way, the civil standard is concerned with the weighing of available evidence to reach a conclusion about the existence of a fact or set of facts as at a particular date and the degree to which the Court must be satisfied that those facts existed at that date. The standard of proof is not concerned with identifying what those facts are.
12. The other thing the Court is concerned with is what facts are relevant to the question of solvency and, in particular, how the Court should deal with future events in assessing the question of solvency. In the present case, the assessment the Court must make is whether it can be said that as from 7 January 2016 Arrium was unable to pay a debt falling due in July 2017. That is not a question of fact in the normal sense. It involves a prediction based on what was known and knowable as at 7 January 2016. In order to make that prediction - that is, in order to be able to say as at 7 January 2016 Arrium could not pay a debt falling due in July 2017 - there needs to be a high degree of certainty that that state of affairs would come about on the basis of the facts known or knowable at the earlier date. Otherwise, it is not possible to say that as at 7 January 2016, Arrium was unable to pay debts falling due in July 2017. At most all that could be said is that it was unlikely that Arrium would be able to pay debts falling due in July 2017. But that is equivalent to saying that Arrium was likely to become insolvent, not that it was insolvent, from 7 January 2016 on.
13. The fact that both the standard of proof and the prediction of future events can be framed in terms of the balance of probabilities does not mean that they are the same thing or that they involve the same assessment. The difficulty involved in predicting the future with sufficient certainty so as to be able to say that what is predicted is true at the time of prediction explains the general reluctance of courts, except in special cases, such as long tail insurance claims, to determine the question of solvency by reference to debts that are not payable immediately or in the near future. It also explains why Fullagar J expressed himself in the terms he did in reaching the conclusion that the insurer in that case was insolvent even though it was in a position to pay its liabilities as they became due for a number of years.
14. Second, the BOC Plaintiffs contend that "A 'mere theoretical possibility' that a creditor may, at some time prior to the debt falling due, agree to alter the amount of the debt or the date upon which it is due and payable, is insufficient to preclude a finding of insolvency, in circumstances where the company is, but for the creditor agreeing to such alteration, otherwise unable to pay the debt as and when it falls due" and that "The party wishing to contend that the assessment of solvency should be conducted on the basis that a contractual debt becomes due and payable on some date, or in some amount, different to that which is stipulated in the contract bears the onus of proving that matter". Although these statements reflect statements of principle that can be found in the cases, they must be treated with some caution in the present context. The statements of principle are normally made in relation to trade creditors who might well expect to be paid when their debts are due. After all, trade creditors are not in the business of providing credit. They are in the business of being paid for the goods or services they provide.
15. The present case is very different. It concerns a publicly listed company which, like many if not most large publicly listed companies, relied on borrowings for part of its working capital. In the normal course of events, it would be expected that the company would rollover or replace on an ongoing basis the relevant borrowings as they became due for repayment. The BOC Plaintiffs bore the onus of proving that Arrium was insolvent. In the present case, it seems to me that as part of that onus, it bore the onus of proving that as from 7 January 2016, it was unlikely that the relevant banks would be prepared to extend their loans on some basis. To hold otherwise would wrongly shift the burden of proof on the question of solvency to the defendants.

Consideration

1. The principal steps in the BOC Plaintiffs' case in relation to solvency are these: 1. Because of Arrium's deteriorating liquidity position, it had a limited time in which to realise sufficient cash to repay, or to refinance, the facilities falling due in July 2017; 2. By 7 January 2016, it was apparent that (1) Arrium's ability to repay the facilities falling due in July 2017 was entirely dependent on the sale of Mining Consumables for a sufficient price to enable it to repay those facilities and to reduce residual debt to a level that could continue to be serviced by the remaining businesses and (2) Arrium would not be able to achieve such a price; 3. If the defendants wished to contend that Arrium's solvency from 7 January 2016 was to be assessed on the footing that Arrium was not in fact required to repay the facilities falling due in July 2017 in full at that time, then they bore the onus of satisfying the Court, on the basis of evidence and not assertion, that there was a firm or imminent arrangement to that effect, which they have not done; 4. The conclusions of the previous subparagraphs are supported by the fact that Arrium was placed into voluntary administration on 7 April 2016, only seven weeks after the last drawdown was made.
2. The first of these steps is essential to the BOC Plaintiffs' case on insolvency. Arrium had at least 16 months to deal with the facilities falling due in July 2017. According to the HY16 accounts, it had total assets of $6,196.9 million and net assets of $2,328.4 million. There is no suggestion that those accounts were defective in some respect. Nor is there any suggestion that Arrium's total assets or net assets decreased substantially in January or February 2016. Consequently, given the time available, it is to be expected that in the normal course of events Arrium would, if necessary, either be able to sell assets or raise finance on security of those assets in order to repay the facilities falling due in July 2017.
3. It is no answer to this point to say that it was apparent by January 2016 that Arrium would not receive an acceptable price for Mining Consumables (assuming that that was the case). Even accepting that a sale of Mining Consumables was necessary, the question is whether Arrium was able to obtain an acceptable price for those assets before the facilities became due. Absent the claim that Arrium had a narrow window in which to sell those assets, there is no reason, for example, why Arrium could not have resumed the sale process later. That, of course, is what the administrators did; and successfully. The businesses in which Arrium operated were cyclical. It is apparent that Arrium was seeking to sell Mining Consumables at a time when there had been a serious downturn in the prices of some commodities on which Arrium's business depended - iron ore, in particular. Those prices were forecast to increase. Similarly, Arrium had embarked on Project Marco which was likely to lead to costs savings which themselves would affect the price that Arrium needed to obtain from a sale of Mining Consumables. Having regard to those matters alone, it could not be said that, looking at the position in the period from 7 January 2016 to 16 February 2016, it was more likely than not Arrium would be unable to raise sufficient cash to repay the July 2017 facilities, even if that is the correct test, if it had the following 16 months to do so. The position was too uncertain to be able to say that.
4. The BOC Plaintiffs' answer to the point made in the previous paragraph is to say that Arrium would not get another opportunity to sell Mining Consumables (or take other steps to address the facilities falling due in July 2017) because it would run out of cash in the few months following its initial unsuccessful attempt. They accept that, up until that time, Arrium was able to pay its trade creditors as their debts fell due and that consequently it could not be said that Arrium was insolvent before that time for that reason. But, according to them, it does mean that Arrium was insolvent because it would not be able to repay the Lenders in 2017.
5. For the proposition that Arrium would run out of cash in the next few months, the BOC Plaintiffs rely principally on what actually happened; and, in particular, the fact that Arrium went into voluntary administration on 7 April 2016. In advancing that case, the BOC Plaintiffs do not clearly explain why the expected future inability to repay the Lenders meant that Arrium was insolvent from 7 January 2016, but the expected future inability to pay trade creditors did not. One explanation could be that the debts to the Lenders had largely been incurred at the time the question of solvency arose whereas the debts to future trade creditors whose debts would not be able to be repaid (if incurred) had not. Looked at in that way, the question of solvency as at a particular date is to be examined by identifying all the liabilities of a company that existed at that date and asking whether each of those liabilities could be paid when it fell due. That may be a practical approach in a simple case. But it does not seem to be practical in the case of a large company that incurs and pays many debts each day. Nor does it seem to be consistent with the principle that the question of solvency should be determined by making a realistic commercial assessment of the company's financial position as a whole. However, for reasons that will become apparent, it is not necessary to pursue this issue further.
6. In my opinion, the case that the BOC Plaintiffs' now seek to advance is the very case that Mr Borsky disavowed during the hearing of the amendment application. They should not be permitted to advance it now. Although there was evidence before the Court that was relevant to the question whether Arrium would run out of cash by about July 2016, it was not an issue specifically addressed by Mr Quentin Olde, the expert on solvency called by the defendants, and Mr David Lombe, the expert on solvency called by HSF. It is an issue they could have addressed specifically. I accept that for that reason the defendants would suffer irremediable prejudice if the BOC Plaintiffs were permitted to advance the argument now.
7. In any event, on the available evidence, I am not satisfied that Arrium would run out of cash at any time before July 2017.
8. Mr Madden (and Mr Olde and Mr Lombe) accepted in their joint report on solvency that: The best available business records for assessing the short-term cash flows of the Arrium Group were the 8-week, 13-week and 17-week liquidity forecasts prepared by the Arrium Group and, at times, Ernst & Young. And that: The best available business records for assessing the cash flows of the Arrium Group longer than 8-17 weeks were the budgets, forecasts and business plans prepared by the Arrium Group, being the: a. Arrium FY16 Budget and Plan Review (May 2015); b. Arrium FY16 Forecast - November 2015; c. Business Plan Update (December 2015); d. Business Plan Update (January 2016); e. Business Plan Update (February 2016); and f. Arrium FY16 Forecast & FY17 Management Estimate (February 2016).
9. None of those sources of information indicate that Arrium would run out of cash prior to the July 2017 facilities falling due. The draft forecast for the 8 weeks commencing 21 December 2015 did suggest that would happen. However, that forecast was found to contain errors and was revised. Some of the cash flow forecasts did indicate that Arrium would breach its liquidity buffer. But that was usually towards the end of the forecast period, where the figures were historically conservative. Moreover, breach of the liquidity buffer did not itself demonstrate that Arrium would run out of cash. Mr William Hardie, the expert retained by the Anchorage Plaintiffs in relation to the question whether there had been a change in financial position of Arrium that had a material adverse effect on its ability to comply with its obligations under the facility agreements included in his expert report dated 9 December 2019 the following table summarising Arrium's liquidity position from June 2015 to February 2016: [footnote omitted] Table [278] - text version (87793, pdf)
10. No-one suggests that the figures included in that table are inaccurate. The table shows that even in February 2016, Arrium had total liquidity of $368 million. The large decrease from December 2015 is explained by the reporting initiatives taken by Arrium and the end of year and half year to reduce temporarily its borrowings.
11. In his affidavit evidence, Mr Madden places considerable emphasis on the Project Polo II Status Report which was included in the board papers for the meeting on 21 January 2016, which forecast $535 million in operating cash outflows for the third quarter of FY16. He gives this evidence: The Polo ll Status Report further forecast that by the end of the third quarter of FY16, the Arrium Group would have only A$79 million in liquidity headroom under the Existing Finance Agreements, prior to the Treasury Policy Liquidity Buffer being applied … and A$83 million available cash. Even allowing for potential improvements as discussed in [the status report], the trend is a significant deterioration over the forecast period. I have not formed a view as to whether the Arrium Group might run out of cash to conduct its ordinary trading prior to July 2017 or July 2018. However, in my view the possibility of this eventuating was a real one and could not be dismissed. The possibility created further uncertainty about whether a turnaround in performance assumed by the Updated Business Plan could be achieved. However, that document is of little assistance in considering Arrium's solvency. As Mr Madden points out, it was a draft. It was not one of the documents which he agreed gave the best indication of Arrium's financial position. The document exaggerates the true position because it includes the reversal of the reporting initiatives that were taken in December 2015. Moreover, Mr Madden stated that he had not formed a view about whether Arrium would run out of cash prior to July 2017 or July 2018. The most he could say was that the possibility of that eventuating was "a real one and could not be dismissed".
12. Arrium's budget and business plans are also not consistent with Arrium running out of cash before July 2017. It is not necessary to set out detailed information from each business plan. The following table sets out the forecast cash flows taken from the budget and business plans relied on by Mr Madden, Mr Olde and Mr Lombe for FY16, FY17 and FY18, where that information is available: FY16 FY17 FY18 ($ million) ($ million) ($ million) May 2015 Budget and Business Plan 101 - - Revised Budget 28 - - (Nov 2015) Updated Business Plan (Dec 2015) 33 347 587 Updated Business Plan 31 335 495 (21 Jan 2016) Updated Business Plan 29 337 498 (4 Feb 2016) Revised Forecast (233) 159 - (16 Feb 2016)

1. As I have explained, the later versions of the business plans (including the one considered at the board meeting on 4 February 2016) included a number of alternative scenarios, many of which were based on the spot price for iron ore. Those versions indicated a substantially worse picture. However, even the "Spot" scenario included in the papers for the 4 February 2016 board meeting indicated that, after negative cash flows of $192 million in FY16 and $19 million in FY17, Arrium would experience positive cash flows in subsequent years (for example, $72 million in FY18). More significantly, the alternative scenarios were included for the purpose of stress testing Arrium's financial position. They modelled possible but not expected outcomes. In fact, as Mr Olde points out, the actual iron ore price generally turned out to be significantly above both the spot price and the price assumed in the relevant business plans. Set out below is a table prepared by Mr Olde comparing the actual iron ore price with the spot price at certain dates and the price assumed in the business plans: Table [282] - text version (65582, pdf)
2. The table indicates that, except for the price assumed in the Updated Business Plan of December 2015, the actual iron ore price was above the assumed and spot prices. Of course, the actual prices cannot be used for the purpose of determining whether Arrium was insolvent in the period from 7 January to 16 February 2016. However, they provide some evidence that the business plans were prepared on a reasonable basis and they support the view that the business plans were an appropriate basis by reference to which Arrium's solvency should be judged.
3. It is apparent from the table comparing cash flow forecasts set out above that Arrium was forecasting that it would be cash flow positive in each of FY16, FY17 and FY18, except for the forecast presented to the board on 16 February 2016, when the forecast changed dramatically to forecast negative cash flows of $233 million in FY16. It is not clear from the evidence how that change came about. In the May 2015 budget, Arrium was forecasting positive cash flows of $101 million in FY16. That forecast changed substantially in November 2015. The change is explained largely by the continuing deterioration of the price for iron ore. It appears that no significant changes were made to the forecast then until the results for HY16 were finalised. The actual results involved negative cash flows of $291 million, which were expected to be partially offset by positive cash flows in the second half of the year. The main explanations given for the negative cash flows was the poor price for iron ore, a decrease in "cash initiatives" of $81 million, which presumably is a reference to tightening credit terms, greater than budgeted restructure and project costs of $21 million and a reduction in assets sales against budget of $63 million. Despite that, as I have said, Arrium was still forecasting positive cash flows in the second half of the year. There is no reason not to accept that forecast. It is true that the forecast in May 2015 and November 2015 had proven to be optimistic. However, much of that optimism was based on a forecast stabilisation or increase in the iron ore price, which did not materialise. Although an improvement in the price of iron ore took longer than expected to happen, it was still reasonable to expect that it would happen soon, since that is what independent reputable third-party forecasters were predicting.
4. Although Mr Madden did not himself embrace the submission now advanced by the BOC Plaintiffs that Arrium would run out of money, he did suggest in his first affidavit sworn on 15 May 2020 that the deferral of the sale of Mining Consumables would give rise to certain difficulties. They included the fact that a delay would give rise to significant concerns with Arrium's suppliers, Lenders and customers. Mr Madden also expressed the opinion that a deferral "would not have realistically achieved a different outcome unless there was a significant turnaround in [existing] business conditions and future expectations, and that depended (in part) on matters that were beyond Arrium's control and were uncertain". However, at most these points illustrate that there was considerable uncertainty concerning Arrium's future. They do not demonstrate that there was no realistic prospect that Arrium would be able to sell Mining Consumables for an acceptable sum before July 2017.
5. Mr Madden, in his second affidavit sworn on 11 December 2020, says in reply to evidence given by Mr Olde that "without the provision of borrowings beyond the Existing Finance Agreements, the Arrium Group may not have been able to pay its debts falling due in the period leading to 30 June 2016". He also expressed the opinion that the Arrium Group "was otherwise in a distressed financial state, which increased the urgency required to address the July 2017 Maturities". Even accepting those propositions, neither of them establishes that Arrium was not in a position to resume the sale of Mining Consumables later in the year. All the first proposition establishes is that there was a risk that it might not have been able to do so. All the second proposition establishes is that it was preferable to deal with the debts maturing in July 2017 earlier rather than later because of the risks associated with a delay - something recognised by the board when it embarked on the Strategic Review.
6. As I have said, in their final submissions, the BOC Plaintiffs rely heavily on the fact that Arrium did go into voluntary administration on 7 April 2016, which was said to be evidence that Arrium was insolvent at that time and insolvent at the time the drawdowns were made. Neither of those propositions is correct.
7. The administrators were appointed under s 436A(1) of the Corporations Act. That section provides that a company may appoint an administrator if the board passes a resolution to the effect that: (a) in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and (b) an administrator of the company should be appointed.
8. Consequently, all the appointment proves is that the directors were of the opinion that Arrium was or was likely to become insolvent. The opinion of the directors does not establish the position objectively. And the resolution is consistent with the directors holding the opinion that Arrium was likely to become insolvent, not that it was insolvent on 7 April 2016.
9. More significantly, the BOC Plaintiffs' contention involves an impermissible use of hindsight. Hindsight cannot be used to establish a fact at some earlier point of time. Rather, at most it provides evidence of what was likely or possible at that time. The fact that Arrium was insolvent on 7 April 2016 (if it was a fact) may be evidence that, as at January or February 2016, Arrium was likely to become insolvent. But it is not evidence that Arrium was insolvent in January or February 2016.
10. In the present case, circumstances changed very substantially between 16 February and 7 April 2016. As at 16 February 2016, it was apparent that Arrium was not going to get an acceptable price for Mining Consumables as a result of the then current sales process. There were, therefore, three main possibilities available to Arrium at that time. The first involved refinancing the whole of its debt with most likely GSO. The second involved reaching an agreement at that stage with its current Lenders in relation to its banking facilities. A third involved doing nothing immediately and addressing the issue later in the year, when market conditions were expected to improve.
11. Each of these options was a realistic possibility as at 16 February 2016 (and before). Plainly, the first was Arrium's preferred option, since it involved Lenders agreeing to be paid substantially less than 100 cents in the dollar, which would benefit shareholders to the detriment of Lenders. The risk (which Arrium recognised) was that the option would not be acceptable to Lenders. That risk came to fruition, which might be thought to have been a likely outcome. However, it was an option that was pursued and analysed in detail on the advice of Lazard and UBS, both of whom are experienced and well-regarded investment banks.
12. The plaintiffs suggest in their submissions that the second option was abandoned by Arrium no later than when it terminated Grant Samuel's retainer in relation to Project Archer. That is not correct. Project Archer was put on hold while Arrium pursued the sale of Mining Consumables. The retainer with Grant Samuel was terminated because there was nothing for them to do in the meantime. Moreover, Lazard, who had continued to be retained generally, had also been retained on Project Archer. In fact, the second option was considered in Lazard's paper which was included in the board papers for the meeting on 11 February 2016. It was rejected by Lazard at that time, partly because, on certain assumptions (which included spot prices for specific commodities), it led to a shortfall in available liquidity in FY17 and a breach of existing covenants in FY17 and FY18. However, that was not the case on the assumption that the price for iron ore was the average of independent commodity forecasters and the prices for other commodities were those forecast by CRU. The second option was unattractive because of the risk that those prices might not be achieved and the fact that it was an option that gave preference to the Lenders over shareholders when compared to the first option.
13. The third option was not seriously considered by Arrium or its advisers. But that does not mean that it was not an available option as at 16 February 2016 (and before), if the other two failed. As I have explained, neither the BOC Plaintiffs nor for that matter Mr Madden in his affidavit evidence sought to demonstrate that Arrium had insufficient liquidity to continue to trade for the foreseeable future. The third option was unattractive because it left Arrium in a state of uncertainty for a substantial period of time and it was unclear if and when Arrium would require additional borrowings before it became cash flow positive.
14. All three options required, or were likely to require, co-operation from the Lenders. The first two plainly did. The third was likely to do so because it would presumably have required the Lenders to rollover drawdowns and possibly to provide some additional liquidity. As at 16 February 2016 (and before), it was reasonable to expect that the Lenders would continue to cooperate with Arrium. Project Archer, which involved reaching an agreement with the Lenders, had been put on hold pending the outcome of the sale of Mining Consumables at the request of the Lenders or at least some of them. Once it became clear that the sale would not proceed and discussions with the Lenders resumed, the Lenders (other than Morgan Stanley) indicated that they did not want Arrium to go into administration, that they were willing to negotiate with Arrium and as part of those negotiations to provide additional liquidity if that was necessary. That, of course, happened after 16 February 2016. But reference to those facts is a permissible use of hindsight, since all that is being said is that what happened provides some evidence of what was possible or likely at an earlier time.
15. Consequently, when the Lenders said that they had lost confidence in the Arrium board, it became clear that an agreement with them and cooperation from them were no longer possible. That was a dramatic change in circumstances. It ruled out any possibility of acceptance of a recapitalisation proposal, or an amend and extend proposal or any accommodation or agreement with the Lenders if Arrium was to continue under the control of the board. That explains why the board appointed administrators. It says nothing about what was possible or likely between 7 January and 16 February 2016.
16. The BOC Plaintiffs take issue with some of the analysis of the previous paragraphs on the basis of cases which state that the onus was on the defendants to establish that a creditor was willing to compromise or extend the time for payment of its debt and that the defendants had not discharged that onus in this case: see, particularly, Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, [2001] NSWSC 621 at [54] per Palmer J; Emanuel Management Pty Ltd v Foster's Brewing Group Ltd (2003) 178 FLR 1, [2003] QSC 205 at [72]ff per Chesterman J. However, as I have explained, the facts of the cases relied on by the BOC Plaintiffs were very different from the facts of the present case. The cases relied on by the BOC Plaintiffs generally concerned trade creditors who, most often, without agreeing to an extension of time, had not taken active steps to insist on payment of debts that had fallen due in the past. The fact they had not done so was not evidence that the debtor was solvent. Just the opposite. Unless the debtor was able to prove that as a result of some actual or imminent agreement or compromise the debts that had or that were about to fall due were not payable in the amount or at the time originally agreed, the fact that it could not pay those debts on time was evidence of insolvency.
17. In the present case, the relevant debts were not due for approximately 18 months or longer. In the normal course of events, it would not have been expected that the debts would be repaid in full. Rather, it is to be expected that they would have been refinanced with the same or different Lenders, quite possibly on different terms and in different amounts. As is apparent from the advice that Arrium was receiving from UBS and Lazard, in some cases, banks may be prepared to accept less than 100 cents in the dollar because they accept that is the best way of maximising their returns on the debt that they are owed. No doubt, in accordance with the principles stated in the cases relied on by the BOC Plaintiffs, if the debts were repayable in the near future and no compromise was likely, the possibility of a compromise was insufficient to establish solvency. However, looking at the position 18 months before the debt was payable, the possibility of compromise together with the other possibilities available to Arrium at that time are relevant to the question whether it can be said at that time that Arrium would be unable to pay debts falling due 18 months later. For the reasons I have given, there were still a sufficient number of possibilities open to Arrium to deal with its bank debt that it could not be said that it was insolvent in January or February 2016.

Introduction

1. The MAE Representation was made by cl 14.1(i) of the Morgan Stanley Facility Agreement and its equivalents and was repeated by cl 14.3 at the time of each drawdown. Under the terms of the facility agreements, the representation was made by Arrium alone. The representation was also repeated by the representation made by the relevant Arrium Entity in each Drawdown and Rollover Notice to the effect that each representation required to be repeated was true as though it had been made at the date of the Drawdown Notice and the Drawdown Date in respect of the facts and circumstances then subsisting.

The correct interpretation of the representation

1. The first issue that arises in relation to the MAE Representation is precisely what the representation conveys. The representation is true if either (1) there was no change in the financial position of Arrium between the relevant Drawdown Dates and either 31 December 2012 (in the case of the 2013 SFA) or the date up until when the last published accounts of Arrium were prepared (in the case of the other agreements) or (2) if there was such a change, that change did not have a material adverse effect on the borrowers' ability to perform their obligations under the relevant agreement. The first limb requires the "financial position" of Arrium to be compared at two points in time. The second requires an objective assessment to be made of the question whether any change had the relevant effect.

The meaning of "financial position"

1. There is a question concerning what is meant by the expression "financial position". The defendants (and HSF) contend that it is a reference to the assets and liabilities of Arrium. The plaintiffs, particularly the Anchorage Plaintiffs, contend for a much broader interpretation that would encompass any change relating to Arrium's business that has an impact on its ability to comply with its financial obligations. A third, intermediate interpretation is to interpret it as a reference to the information disclosed in Arrium's "Accounts" (as defined in the facility agreements).
2. The defendants (and HSF) submit that the meaning of "financial position" for which they contend is consistent with its technical accounting meaning and that is the meaning that the parties intended to adopt. That is said to be so for two main reasons. First, it is a requirement of the facility agreements that the relevant Accounts (which provide one of the comparators for the comparison required by the first limb of the MAE Representation) must be prepared in accordance with Australian Accounting Standards and those standards use the expression in its technical sense. Second, they contend that the comparative exercise required by the representation can only sensibly be undertaken by reference to Arrium's assets and liabilities and that consequently that is the meaning that the parties must have intended the expression to have. A third reason is that the facility agreements appear to draw a distinction between the "financial position" of Arrium and its "financial condition". The latter expression is used in cl 17.1(i), which states that it is an Event of Default if "a change occurs in the financial condition of the Relevant Group … which constitutes a Material Adverse Effect (and the situation is not remedied within 15 Business Days of being required to do so by notice from the Lender)". Accordingly, when the parties wanted to refer to the financial circumstances of Arrium more broadly, they used the phrase "financial condition", leaving "financial position" to be interpreted in accordance with its technical meaning.
3. The defendants and HSF are correct to say that "financial position" is often used in a technical accounting sense to refer to the balance sheet of the company. AASB 101 entitled "Presentation of Financial Statements" is a good example. Paragraph 10 of that Accounting Standard (as it existed at the time the facility agreements were entered into) provided: 10 A complete set of financial statements comprises: (a) a statement of financial position as at the end of the period; (b) a statement of profit or loss and other comprehensive income for the period; (c) a statement of changes in equity for the period; (d) a statement of cash flows for the period; (e) notes, comprising a summary of significant accounting policies and other explanatory information; (ea) comparative information in respect of the preceding period as specified in paragraphs 38 and 38A; and (f) a statement of financial position as at the beginning of the preceding period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements in accordance with paragraphs 40A-40D. Paragraph 54 states that "[a]s a minimum, the statement of financial position shall include line items that present the following amounts:". There is then listed a series of assets and liabilities.
4. It is apparent from these provisions that the expression "statement of financial position" is used in AASB 101 to refer to the balance sheet of the company. But equally, as the Anchorage Plaintiffs point out, "financial position" is used in a broader sense to refer to the financial circumstances of the company. So, for example, s 588GA(2) of the Corporations Act states that, for the purpose of determining whether a person is entitled to the safe harbour defence to a claim of insolvent trading that is provided by that section, regard may be had to, among other things, whether the person "is properly informing himself or herself of the company's financial position". The reference to "financial position" in this context is plainly broader than the company's balance sheet. Similarly, a condition precedent to Arrium's rights under the facility agreements is the provision of a certificate by the directors certifying that the then most recent Accounts "are a true and fair statement of the Group's financial position as at the date to which they are prepared and disclose or reflect the Group's actual and contingent liabilities as at that date". In this context it is said that the reference to the Group's "financial position" must be a reference to all of the financial information contained in the Accounts.
5. There is no rule or principle of law which requires the Court to choose the technical meaning over the broader, ordinary one. It is sometimes said that the words of a contract should be given their ordinary or natural meaning unless it is apparent that the parties intended them to have some other meaning: see, for example, Manufacturers' Mutual Insurance Ltd v Queensland Government railways (1968) 118 CLR 314 at 321 per Windeyer J. However, that principle must be understood as one that applies where the alternative meaning involves a departure from a recognised meaning of the words. Where a word or phrase has both an ordinary meaning and a recognised technical meaning, which meaning the parties intended the word or phrase to have is to be resolved in accordance with ordinary principles of contractual interpretation. Those principles require the Court to determine what a reasonable business person would have understood the phrase to mean, which requires consideration of "the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract": see Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at [35] per French CJ, Hayne, Crennan and Kiefel JJ.
6. In my opinion, little turns on the fact that the facility agreements require the relevant accounts to be prepared in accordance with Australian Accounting Standards. The purpose of that provision is to ensure that the accounts that are provided to the Lenders fairly describe the financial circumstances of the company. The information to be provided to the Lenders obviously extends to all of the information that is required to be included in financial statements in accordance with para 10 of AASB 101, and all of that information must be prepared in accordance with the Accounting Standards. That is what the definition of "Accounts" states. The fact that the parties chose to identify the financial information to be supplied to the Lenders, and the standards that that information had to satisfy, by reference to the Australian Accounting Standards does not mean that they intended (objectively) to adopt the meaning given to each expression used in those standards.
7. Indeed, the opposite appears to be the case. The structure of the representations contained in the facility agreement is that Arrium was required to provide the half yearly and end of year accounts to the Lenders. Plainly, those accounts included more than a balance sheet. By cl 14.1(h), Arrium warranted that those accounts were "a true, fair and accurate statement of [Arrium's] consolidated financial position." In that context, the reference to "financial position" must mean more than the information contained in the balance sheet. Otherwise, there would be no point in requiring Arrium to supply the Accounts (as defined), and there would be no point in requiring the warranty in cl 14.1(h) to be given in relation to the Accounts (rather than the balance sheet). Clauses 14.1(h) and 14.1(i) must be read together. The change in position with which cl 14.1(i) is concerned is the position referred to in cl 14.1(h) - that is, the position disclosed in the Accounts.
8. As the defendants point out, it is a straightforward task to identify changes in the balance sheet between two dates. That simply involves comparing the same line items in two balance sheets - one contained in the relevant Accounts and the other presumably derived from management accounts for the purposes of the comparison. It is more difficult to compare other items in the financial statements, since those items do not generally reflect the company's financial position at a point in time. For example, the profit and loss statement identifies the income earned and the amounts expended over a period of time; and the periods of time between which the comparison is to be made will not be comparable. The Accounts will identify the income and expenditure over a year or six months, whereas the comparator for the purpose of the application of the MAE Representation will be income earned and expenditure incurred in some other period of time determined in some way by reference to the date at which the warranty is given. Moreover, changes in the financial position of the company, broadly defined, are likely to be reflected in the balance sheet, since those changes are likely to have an impact on the value of the assets and liabilities as disclosed in the balance sheet. If, for example, an asset is sold for a loss, that loss will need to be brought to account. If the company makes a trading loss, that loss will be reflected in a reduction in the net assets of the company. According to the defendants, the first of these points demonstrates that it is not practical to give "financial position" the broad meaning for which the plaintiffs contend and second demonstrates that no commercial purpose is served by doing so, since the object of the representation will be served by the narrow interpretation.
9. I do not accept either of those propositions. No doubt it is more difficult to compare financial metrics that are not determined at a point in time, as balance sheet items are; and the comparison is likely to involve the exercise of some judgment. But that does not mean that the comparison cannot be made. So, for example, it is possible to say that a company has become less profitable over a period of time and to describe that change as a change in the financial position of the company. However, in order to reach that conclusion, it is obviously not possible simply to compare two figures. Rather, it is necessary to undertake some analysis and apply some judgment. Just what that requires will depend on the circumstances. For example, suppose the assessment is to be made on 1 January. As at that date, the most recent Accounts delivered in accordance with the relevant facility agreement will be the annual accounts for the previous financial year, which will disclose the income, expenditure and profit for that year. In order to compare those figures with the position as at 1 January of the subsequent year, it will be necessary to determine the profit made during the six-month period from 30 June to 1 January. It will then be necessary to compare that figure with a comparable figure for the previous financial year. That will involve determining the profit earned during a similar period in the previous financial year. It may also involve making adjustments for one-off items that are incurred in either period. It will then be necessary to make a judgment on whether the results indicate that there has been a change in profitability over the relevant period.
10. As to the second proposition, not all changes in the financial circumstances of a company will find their way into the balance sheet. For example, an increased risk of insolvency would be regarded as a change in financial position on the broader definition, but that increased risk may not necessarily be reflected in a change in the balance sheet.
11. There is more force in the argument that the parties must have intended the expressions "financial position" and "financial condition" to have different meanings and in those circumstances it is appropriate to give "financial position" its technical meaning and "financial condition" a broader meaning that encompasses the ordinary meaning of both expressions, applying the presumption that different words in a document were intended (objectively) to have different meanings: see Eureka Funds Management Ltd v Freehills Services Pty Ltd (2008) 19 VR 676; [2008] VSCA 156 at [52] per Cavanough AJA. However, the two expressions are used in different clauses and there is a lack of precision in the drafting of the clauses, particularly cl 17.1, which suggests that the drafter has not paid close attention to the way the clauses fit together. Clause 14.1 sets out certain representations and warranties which are repeated at the time of each drawdown by force of cl 14.3. Clause 14.1(i) contains the MAE Representation. Clause 17.1 sets out what amounts to an Event of Default. It operates to create an Event of Default based on a Material Adverse Effect in two ways. First, if the MAE Representation is untrue, incorrect or misleading in a material respect and the other conditions set out in cl 17.1(c) are satisfied that is an Event of Default. One of those conditions is that the relevant lender forms the opinion reasonably that "the consequences of which" (which, presumably is a reference to the consequences of a breach of the warranty) constitutes a Material Adverse Effect. What that means is not clear. In order for the MAE Representation to be untrue or misleading, there has to be a material change in financial position that has a material adverse effect on Arrium's ability to comply with its obligations under the relevant facility agreement. Accordingly, taken literally, the condition seems to require a Lender to be reasonably satisfied that a material change in financial position that has a material adverse effect on Arrium's ability to comply with its obligations constitutes a material adverse effect on Arrium's ability to comply with its obligations. Stated in that way, there is a degree of circularity or redundancy in the language used.
12. The second way in which cl 17.1 operates to create an Event of Default by reference to a Material Adverse Effect is to provide in cl 17.1(i) that it is an Event of Default if there has been a change in financial condition, or a change in the whole or a major part of Business Operations, which constitutes a Material Adverse Effect and that change is not remedied within 15 Business Days of being required to do so by notice from a lender. The difficulty with that provision is that it is unclear over what period the change is to be measured. Presumably, in the absence of some period being specified, the relevant period is the period from the date the relevant facility agreement was entered into. But why the parties should choose that date as the date by reference to which cl 17.1(i) should operate but (except in the case of the 2013 SFA facility) a different date by reference to which cl 14.1(i) should operate is unclear.
13. It is, of course, unnecessary to resolve the constructional issues raised by cl 17.1, since there is no allegation that Arrium committed an Event of Default, not least because no notice requiring a potential Event of Default to be remedied was given. The point, however, is that the drafting of cl 17.1 is far from perfect, which undermines the force of the argument that the parties deliberately chose "financial position" to express a concept which was different and narrower than the one encapsulated by the expression "financial condition". It is just as likely that they did not pay careful attention to the different expressions they used in different clauses of the agreement. And the fact that the parties used what on any view is a concept that has a non-technical meaning as a comparator in cl 17.1(i) undermines any suggestion that they thought it was impossible for the comparison to be made except where it was between the financial positions narrowly understood at different dates.
14. In my opinion, the wider interpretation is also more consistent with the object of the clause. Arrium was required to give the Lenders copies of its annual and half yearly accounts. On receiving those accounts, the Lenders were able to make an assessment of whether Arrium's financial circumstances had changed either from the time the facility was entered into (in the case of the 2013 SFA facility) or from the last set of accounts. If they thought that that circumstance had changed, they could have refused to provide any further advances under the agreement on the basis that the condition precedent had not been complied with. There is no commercial reason for drawing a distinction between information revealed by the balance sheet and other information contained in the Accounts. The purpose of the representation and warranty in cl 14.1(i) was to give the Lenders a level of comfort that was similar to the one they could get by reviewing the Accounts themselves in respect of the period for which they did not yet have Arrium's Accounts.
15. Conversely, I do not think the term "financial position" has the broad and amorphous meaning for which the plaintiffs contend. That meaning makes the first limb of the representation otiose, since it appears to encompass any change that constitutes a Material Adverse Effect. Moreover, it is not clear why the parties would have intended the representation and warranty to go beyond the type of information available from the Accounts. As I have explained, the structure of the MAE Representation is that Arrium represents and warrants that the Accounts are a true and fair statement of the consolidated financial position as at the date to which they are prepared. Arrium is not required to give the Lenders any other information at the time it is required to give them the Accounts. The Lenders are expected to make their own assessment of the financial position of Arrium on the basis of those accounts, and to ask for additional information if they want it. The warranty given in relation to changes in financial position is only given in respect of changes since the relevant Accounts were provided. It is natural in those circumstances to interpret the warranty as covering only changes in the information contained in the Accounts, and not other changes.

The meaning of "material"

1. The parties, particularly the Anchorage Plaintiffs, made extensive submissions on the meaning of "material" in the context of a material adverse change clause by reference to decided cases. Ultimately, however, "material" is an ordinary English word that must be construed in the context in which it appears. Other cases which construe the word in different if similar contexts are of limited assistance.
2. In the present case, what must be "material" is the effect of a change in financial position on Arrium's ability to perform its obligations under relevantly the facility agreements. It appears to be common ground that "material" in this context means "significant" or "substantial", although how helpful it is to substitute for the word one of its synonyms is open to some doubt. Importantly, though, the effect in this case must be judged objectively. It does not depend, as is often the case, on an opinion formed or reasonably formed by a Lender. And the effect must be on the ability of Arrium to comply with its obligations under the facility agreements - relevantly, in this case on its ability to repay the facilities when they became due. Accordingly, the question is whether any of the changes in financial position identified by the plaintiffs materially affected Arrium's ability to repay the facilities and, most immediately, those due in July 2017. Necessarily, that involves a question of judgment concerning the effect of a change on future events. It would include a change in financial position which materially increased the risk that Arrium would not be able to repay the facilities when due. But in order to be able to say that such a change had occurred, it would be necessary to identify the risk that existed before the change and be able to say that there had been a material increase in that risk as a consequence of the change.

Consideration

1. The first limb of the MAE Representation raises the question whether there was a change in Arrium's financial position from the end of the accounting period for which the most recent accounts were available (or from 31 December 2012 in the case of the 2013 SFA facility) and the dates on which a relevant Drawdown Notice was given or the drawdown the subject of the notice was advanced. That requires a comparison to be made between the position as at 30 June 2015 (or 31 December 2012) and, in the case of the Anchorage Plaintiffs, dates ranging from 22 December 2015 (when the first impugned Drawdown Notice was issued) to 12 February 2016 (when the last rollover occurred). As I have already explained, in the case of the BOC Plaintiffs, the comparator is the financial position of Arrium at dates ranging from 7 January 2016 to 16 February 2016. The second limb requires consideration of whether those changes had a Material Adverse Effect.
2. Consistently with the broad meaning they give to the phrase "financial position", the Anchorage Plaintiffs identify a large number of matters that they say were changes in financial position that resulted in a Material Adverse Effect. They group them into the following categories: 1. Changes in external environment and market conditions; 2. Changes in Arrium's key financial metrics; 3. Change in Arrium's cash flow, debt levels and liquidity; 4. ANZ's demand for cash collateral; 5. Arrium's need for an emergency standby facility; 6. Arrium's liquidity forecasts; 7. KPMG's going concern disclosure; 8. Arrium's use of the GSO interim facility; and 9. Other indicia of a lack of liquidity.
3. The BOC Plaintiffs, on the other hand, content themselves with three matters. They are: 1. A material change in the Gearing Ratio; 2. A material change in the ICR (that is, the interest cover ratio); and 3. A material change in the likely sale value of Mining Consumables.
4. Despite the list of changes provided by the Anchorage Plaintiffs, it is apparent that in substance their primary case is that Arrium's financial circumstances (broadly understood) deteriorated during the period from 30 June 2015 to 31 December 2015 to the point where there was a material increase in the risk that it would not be able to repay the amounts it owed under the facility agreements. According to them, that increase in risk was a Material Adverse Effect. In making that submission, the Anchorage Plaintiffs point to many of the same matters as the BOC Plaintiffs point to in their case that Arrium was insolvent. Essentially, the case is that because of the decrease in the price of and demand for key commodities, particularly iron ore and steel, Arrium was making unsustainable losses that meant that it faced an increased risk that it would run out of cash before it could sell assets for a sufficient price to enable it to repay the facilities, particularly those falling due in 2017.
5. The defendants (and HSF) take issue with the claim put in that way on two bases. First, they submit that it rests on a mistaken interpretation of financial position. Second, they submit that in any event, there was not a material change in effect because it was apparent that Arrium would be able to repay the facilities.
6. It is apparent from what I have already said that I accept the first of these points. I do not accept the second. It is convenient to explain why I do not accept the second point before turning to the consequences of my acceptance of the first.
7. The defendants provided an extensive report from Mr Olde on the question whether the MAE Representation was true, which contained a detailed analysis of Arrium's financial position (broadly understood). It is not necessary to deal with the report in any detail. The factual basis which underpins Mr Olde's conclusions are set out earlier in this judgment. Mr Olde accepts that there was a change in financial position. However, he concludes that the changes in financial position did not have a Material Adverse Effect. He summarised his reasons in the following paragraph: 395. I have formed the view that there was enough optionality throughout the Relevant Period to determine that there were reasonable prospects that the existing maturities under the Existing Finance Agreements could have been dealt with. I hold this view for the following reasons: 395.1 As described at Paragraph 135, the Arrium Group would typically approach existing lenders regarding the impending July 2017 Maturities in April or May 2016 (which were some months after the Relevant Period); 395.2 As described at Paragraph 129 and reviewed at Table 6.02, the time period of 16 to 18 months would not be considered unusual to deal with the impending July 2017 Maturities; 395.3 As described at Paragraph 377 to 380, a Project Archer type engagement or negotiation (approaching the lenders of the Existing Finance Agreements to discuss an amendment and extension option after a [sic] unsatisfactory outcome of Project Columbus by mid-February 2016) remained an untested option during the Relevant Period; 395.4 As described at Paragraph 385, no definitive decision was made by the Arrium Group during the Relevant Period with respect to entering the GSO Recapitalisation Plan; and 395.5 As will be described in Section 11, there remained untested options that I am aware of as an experienced restructuring advisor that may have been utilised by the Arrium Group to deal with the July 2017 Maturities, especially when considering the length of time between the Relevant Period and July 2017.
8. In my opinion, there are two difficulties with Mr Olde's reasoning. First, he addresses the wrong question. The question is not whether there remained a reasonable prospect that Arrium would be able to deal with the maturities under the facilities. The question was whether the changes in financial position materially changed the chances of it being able to do so. To a large extent, that depended on whether the forecast improvement in Arrium's financial position would materialise or not, which depended heavily on whether the price of iron ore would increase in accordance with forecasts or whether it would remain at historic lows for an extended period of time. The emphasis of matter note included in the HY16 accounts strongly suggests that the risks associated with Arrium's business had increased since June 2015, with a resulting increase in the risk that the Lenders would not be repaid in full. The defendants led no evidence to suggest otherwise. There appears to be no issue that the risk had increased substantially since December 2012. At that time, Arrium was making substantial profits and its net assets were approximately $3,833,700,000, approximately $1.5 billion more than they were as at 31 December 2015.
9. Second, although the ability of Arrium to deal with its debts through extension or compromise may be relevant to the question whether it was solvent, it is not relevant to the question whether there was a Material Adverse Effect. Whether there was a Material Adverse Effect turns on whether there was something which had a material adverse effect on Arrium's ability to comply with its obligations under the facility agreements. Those obligations included an obligation to repay the loans on specific dates. Consequently, if something happened which made it less likely that it would be able to do so, that was a Material Adverse Effect, even if it was highly likely, for example, that the Lenders would agree to an amend and extend proposal. It is the change in risk that is important, not its absolute value.
10. The question still remains whether there were changes in Arrium's financial position properly understood that had a Material Adverse Effect. The plaintiffs do not directly address that issue in their written submissions. However, they maintained in oral submissions that even on the narrower interpretation of "financial position" that I prefer there was a Material Adverse Effect.
11. It is apparent from what I have already said that many of the "changes" relied on by the Anchorage Plaintiffs are not changes in Arrium's financial position properly understood, since they are not changes in the financial position of Arrium as set out in its Accounts. Moreover, a number of matters are not so much changes as circumstances existing at a particular point in time which might either be said to be a consequence of a change in financial position or likely to cause a change in financial position.
12. The principal changes in market conditions referred to by the Anchorage Plaintiffs were the decline in the prices for iron ore, copper, gold and steel, a decrease in the global demand for steel products and a decline in the Australian dollar compared to the US dollar. The decline in the prices for copper and gold are said to have had a negative impact on Mining Consumables. The decline in the Australian dollar is said to have increased Arrium's net debt and debt servicing costs, since most of Arrium's debt was in US dollars. On the conclusions I have reached, none of these changes are changes in Arrium's financial position, although they may have had an effect on Arrium's financial position.
13. The Anchorage Plaintiffs list a large number of "key financial metrics" that are said to have changed. One group of changes is identified by reference to Arrium's forecasts and budgets and the fact that Arrium fell substantially short of those forecasts and budgets. Those changes are not changes in Arrium's financial position between 30 June 2015 (or 31 December 2012) and the relevant dates. The fact that Arrium fell short of its FY16 budget or forecast does not itself mean that its financial position changed from 30 June 2015. To take an obvious example, the budget or forecast could have predicted that Arrium would do substantially better than the previous financial year whereas in fact it may have done no better. That could not be regarded as a change in financial position for the purpose of the relevant facility agreements.
14. The Anchorage Plaintiffs also point to the following changes in the position as at 31 December 2015 compared to the position as at 30 June 2015: 1. Arrium's revenue had declined by $454 million. Its underlying EBITDA was down 21 percent from $351 million to $277 million; 2. Arrium's underlying operating cash flow had decreased by 487 percent from $49 million to negative $188 million and its statutory free cash flow was down 23 percent, from negative $536 million to negative $660 million (even though there had been a reduction in capital expenditure of approximately $125 million); 3. Arrium's NPAT had deteriorated 30 percent, from negative $7 million to negative $9 million; 4. Arrium's net debt increased by 19 percent from $1.75 billion to $2.076 billion and was forecast to increase further to at least $2.3 billion by the end of January 2016 and its leverage ratio was up 50 percent from 5.0x to 7.5x; 5. Arrium's interest cover ratio had deteriorated from 4.33x to 3.77x and its gearing had deteriorated from 0.41 to 0.47; 6. Arrium's Mining business, which had generated EBITDA of $686 million in FY14, had begun generating negative EBITDA and was operating at a loss in the order of $250 million; and its recycling business had also begun operating at a loss; 7. Arrium had impaired its Mining cash generating unit by $106.7 million and its Recycling cash generating unit by $36.8 million.
15. The Anchorage Plaintiffs also point to the fact that the deterioration was worse when comparing the position to the position as at 31 December 2012. It is not necessary to set out each measure that they point to. A number relate to a deterioration in the performance of individual businesses. Some relate to changes in external factors such as the price of iron ore, a decline in the steel industry generally and movements in the Australian dollar. The critical changes are the fact that Arrium's NPAT for FY14 was $296 million compared to a loss of $223.6 million in HY16 and the fact that its net asset position was $3.73 billion as at 30 June 2014 compared to $2.328 billion as at 31 December 2015.
16. In my opinion, changes in the financial performance of individual business units are generally not relevant to a change in Arrium's financial position except to the extent that those changes are reflected in Arrium's financial position taken as a whole. The MAE Representation is concerned with the group's financial position, not the performance of individual businesses. Similarly, it is the financial performance of the group, not the financial performance of individual businesses, that affected Arrium's ability to comply with its obligations under the facility agreements. Accordingly, it is unnecessary to consider the financial performance of individual businesses.
17. I accept that there were a number of changes in Arrium's "financial metrics" which amounted to a change in Arrium's financial position between 31 December 2015 and 30 June 2015 and 31 December 2012 and that those changes continued at least until 16 February 2016. Those changes were a change in net assets and a change in net profit which had consequences for the interest cover ratio and the gearing. It will be necessary to say more about the extent of those changes later in this judgment. The other changes referred to by the Anchorage Plaintiffs are either reflected in those changes or themselves are not relevant to changes in the financial position of the group.
18. The Anchorage Plaintiffs also make extensive submissions concerning the deterioration in the liquidity of Arrium. Like the BOC Plaintiffs, they submit that by December 2015 "Arrium was running out of cash" and that "it was not going to be able to sustain those cash losses indefinitely" and that it faced an "acute liquidity crisis". In support of those allegations, they refer to Mr Hardie's evidence, which was largely in the nature of submissions based on contemporaneous records, concerning losses that Arrium made in HY16 and early in calendar 2016. They point to the fact that there is evidence that Arrium's electricity supplier wanted to end its contract and that it may have been difficult to secure a new contract or continued gas supplies without providing "credit support" or paying in advance. No attempt, however, is made to analyse the position carefully as at particular dates or to compare the information disclosed in the Accounts for FY15 or for the half year ended 31 December 2012 with the position between 22 December 2015 and 12 February 2016. I accept, however, that Arrium made losses in HY16 and early calendar 2016 and that those losses were reflected both in an increase in debt and a decrease in net assets and that to that extent there were changes in the financial position of Arrium.
19. The Anchorage Plaintiffs also rely on the 8 and 13 week cash flow forecasts as indicating a further deterioration in Arrium's liquidity position. But again, for the reasons I have given, those forecasts do not themselves constitute a change in financial position.
20. I do not accept that ANZ's demand for cash collateral was a change in Arrium's financial position. That demand, and Arrium's agreement to it, had no consequences for Arrium's financial position as disclosed in the Accounts. The same is true of what is said to have been Arrium's need for what is described as "an emergency standby facility". That facility was put in place after 12 February 2016 and had no effect on Arrium's financial position as would have been disclosed in Accounts prepared as at any of the dates on which a Drawdown Notice was given or a drawdown occurred.
21. The going concern disclosure was made in accordance with AASB 101 paras 25 and 125. The bold text of para 25 (which states the main principles) provides: When preparing financial statements, management shall make an assessment of an entity's ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity's ability to continue as a going concern, the entity shall disclose those uncertainties. When an entity does not prepare financial statements on a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern.
22. The bold text of para 125 states: An entity shall disclose information about the assumptions it makes about the future, and other major sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. In respect of those assets and liabilities, the notes shall include details of: (a) their nature; and (b) their carrying amount as at the end of the reporting period.
23. It is apparent from these provisions that the requirement to include a note concerning going concern arose when management became aware of "material uncertainties related to events or conditions that may cast significant doubt upon the entity's ability to continue as a going concern" over the next financial year. I accept that the inclusion of that note represented a change in financial position, since as at the date the accounts were signed management had formed the view (no doubt, under pressure from KPMG) that there was a material uncertainty concerning whether Arrium could continue as a going concern whereas that uncertainty did not exist as at 30 June 2015 or 31 December 2012.
24. The question is when that uncertainty first arose. That does not depend simply on an objective assessment of the risk that Arrium would become insolvent as at particular dates. Rather, it turns on when management formed the relevant view, since it is the formation of that view that triggers the requirement to include the note and it is the inclusion of the note that is said to represent the change in financial position. That question is never properly addressed by the Anchorage Plaintiffs. It appears that the question whether Arrium was a going concern or whether some note should be included in the HY16 Accounts was the subject of discussion between KPMG and Mr Bakewell in the second half of January 2016. However, it was not until the ACC meeting on 3 February 2016 that KPMG proposed that a note should be included in the Accounts. The members of the ACC accepted that proposal in principle at that time. The issue was not formally raised by KPMG until its draft letter sent to Mr Bakewell on 8 February 2016 and it was only after that letter was sent that the terms of the note were agreed. The inclusion of the note was first raised with the board at the meeting on 11 February 2016. Although each of Arrium's directors was cross-examined, none was asked about when he or she first formed the view that it was appropriate to include a note in the HY16 Accounts concerning going concern. In my opinion, absent any other evidence, it was on 11 February 2016, when the issue was considered by the board for the first time and the board apparently accepted that it was appropriate to include the note in the Accounts.
25. A similar problem exists with the BOC Plaintiffs' contention that there was a material change in financial position because the likely sale value of Mining Consumables decreased over time. That itself was not a change in financial position; and there is no suggestion that the value of Mining Consumables should have been written down at any time prior to its sale.
26. The question, then, is whether the changes in financial position properly understood materially increased the risk that Arrium would not be able to repay the facilities at the time they became due. The relevant changes fall into four categories: 1. Changes in the balance sheet of Arrium and, most significantly, changes in Arrium's net assets; 2. Changes in Arrium's profitability; 3. Changes in the Gearing Ratio and ICR; and 4. The going concern disclosure.
27. In considering these questions, it seems appropriate to focus on the position as at 31 December 2015, 31 January 2016 and 28 February 2016. Drawdown Notices were served and drawdowns were made on a number of dates between 22 December 2015 and 16 February 2016. It is not possible to determine accurately Arrium's net assets, profitability, Gearing Ratio and ICR on each of those dates and it is doubtful that the amounts were substantially different depending on the precise date in issue. A reasonable and practical approach is to focus on the three dates referred to and assume that the financial position of Arrium on the dates in question was materially the same as the financial position on which of those two dates the date in question was closer. It is not suggested that Arrium's net assets, the Gearing Ratio or ICR changed materially between 31 December 2015 and 16 February 2016. Consequently, it seems appropriate to focus on the position as at 31 December 2015 and only consider Arrium's profitability at the later dates.
28. Set out below are two tables taken from Mr Olde's report which summarise the position: Table [345] - text version (93273, pdf)
29. Set out below is a table summarising information contained in Arrium's management accounts in relation to the profit it earned in January and February 2016: Jan Feb Month YTD Month YTD ($m) ($m) EBITDA (underlying) (1.1) 113.7 20.8 134.5 NPAT (underlying) (34.9) (59.0) 4.8 (54.2)

EBITDA (statutory) (5.0) 34.8 14.2 48.9 NPAT (statutory) (39.0) (131.4) (13.4) (288.3)

The year to date figure for statutory net profit after tax for February 2016 appears to be an error. It is not consistent with the year to date figure for January 2016 and the monthly figure for February 2016.

1. It seems plain on these figures that the most significant change occurred between 30 June 2014 and 30 June 2015, when Arrium made a small underlying loss compared to a substantial profit in the previous year and made a large statutory loss as a result of restructuring costs and, more significantly, the recognition of large impairments on assets, no doubt resulting from the deteriorating market conditions. Those losses were reflected in a substantial decline in net assets. The changes between 30 June 2015 and 31 December 2015 do not appear to be that significant. Mr Olde used as the appropriate comparator in relation to profits the results for the twelve months to the end of December 2015. The Anchorage Plaintiffs do not suggest that that comparator was inappropriate. It indicates that Arrium was continuing to suffer small underlying losses of the same magnitude. The statutory figures suggest that the position was worse in HY16 than it was in reality, since most of the reported losses included in the 12 month period occurred in the first six months. The management accounts for December 2015 indicate that for the six months to the end of December 2015, statutory EBITDA was $95.9 million, depreciation and amortisation had a negative impact of $106.2 million and that the statutory loss was $36.5 million. The profit results for January and February 2016 suggest that the position was continuing to improve.
2. A further difficulty for the Anchorage Plaintiffs' case is that they do not explain how the changes in net assets and in profits increased the likelihood that Arrium would not be able to repay the facilities when they fell due. In particular, the Anchorage Plaintiffs made no attempt to assess the likelihood that Arrium would not be able to repay the facilities based on the 30 June 2015 Accounts (or for that matter, the 31 December 2012 Accounts) compared to the likelihood of that happening based on the 31 December 2015 Accounts. It might be easier to infer that there was a material change in risk between 31 December 2012 and 31 December 2015. After all, over that period, Arrium went from making substantial profits to making losses and its net assets decreased by approximately $1.5 billion. However, the difficulty with drawing that inference is that it is not supported by any evidence or submissions and it appears that the Lenders themselves did not reach that conclusion. The relevant changes became apparent following the release of the FY15 Accounts. But none of the Lenders suggested that following the release of those accounts there had been a change that had a Material Adverse Effect, and each was apparently content to continue to advance money in accordance with Drawdown Notices served after that time.
3. The same problem exists with the BOC Plaintiffs' case. The only changes they point to that could properly be regarded as changes in Arrium's financial position are the changes in the Gearing Ratio and the ICR. But nowhere do they explain how those changes had a Material Adverse Effect on Arrium's ability to comply with its obligations under the relevant facility agreements. Moreover, the facility agreements contained covenants in relation to those ratios. Arrium was required to ensure that the Gearing Ratio (that is, the ratio of Consolidated Net Financial Indebtedness to Consolidated Net Financial Indebtedness plus Consolidated Net Worth) would not exceed 0.55 to 1.00 and that the ICR (that is the ratio of EBITDA to Debt Service for any rolling 12 month period ending on a Reporting Date (that is 30 June or 31 December)) exceeded 3.35 to 1.00. It is not said that either of those covenants was breached. It is to be expected that the ratios set out in the agreements were chosen because breach of them might materially affect Arrium's ability to comply with other obligations under the facility agreements - in particular, the critical obligations to pay interest and repay the loan when due. Conversely, if the covenants relating to the ratios were not breached, it is reasonable to infer that a change in the ratios alone would not materially affect Arrium's ability to comply with its other obligations under the agreements.
4. The other Material Adverse Effect identified by the BOC Plaintiffs is the claim that by 7 January 2016 there was no reasonable basis to expect that Arrium could obtain a price of at least USD1.35 billion for Mining Consumables. Even assuming that a material change in the likely sale price for Mining Consumables could be described as a change in financial position (which seems doubtful), nowhere do the BOC Plaintiffs explain why the figure of USD1.35 billion was critical to the question whether the change had a Material Adverse Effect. Even on the BOC Plaintiffs' case, what seems to be critical is whether there was a reasonable prospect of Arrium obtaining a sufficient price for Mining Consumables to enable to repay the Lenders and the Lenders who were due to be repaid in 2017, in particular. The BOC Plaintiffs do not point to any evidence which would demonstrate that there was no reasonable basis for thinking that such a price was unachievable as part of the then current sales process. Indeed, if that had been the case, it is to be expected that UBS and Lazard would have said so. They did not. The true position was that the prospects of obtaining an acceptable price for Mining Consumables deteriorated over time, but until final bids were lodged it was impossible to say whether an acceptable price would be achieved or not. The deterioration in the prospects of obtaining an acceptable price for Mining Consumables was not itself a change in financial position.
5. In my opinion, the going concern disclosure falls into a different category. I have already concluded that the decision of the directors to include that disclosure in the accounts was a change in financial position. As I have said, that decision appears to have been taken on 11 February 2016, although no formal resolution was passed at that time. The formal decision to include the note was not taken until the board meeting on the morning of 17 February 2016. The decision to include that disclosure was a Material Adverse Effect. It indicated that there was an uncertainty (which may be material) "as to whether the Group will continue as a going concern and therefore whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report". If Arrium's financial position had reached the point that warranted the inclusion of that note, it seems reasonable to infer that there was a material increase in the risk that the Lenders would not be repaid in full compared to the position as at 30 June 2015 (and 31 December 2012).
6. It follows from what I have said that I am not satisfied that there was a change in Arrium's financial position which had a Material Adverse Effect before 11 February 2015 but that I am satisfied that there was such a change on and from that date.

A preliminary issue

1. As I have explained, the claims in the Anchorage Proceeding rely on two main representations - the MAE Representation and the No Event of Default Representation. The MAE Representation has two forms. In the case of all facilities except the 2013 SFA, it is a representation to the effect that there had been no change in the financial position of Arrium since the date up until when the last published accounts of Arrium were prepared which had a Material Adverse Effect. In the case of the 2013 SFA, the relevant comparator is the financial position of Arrium as at 31 December 2012. Both the MAE Representation and the No Event of Default Representation are said to have been made both by the terms of the facility agreements and by the terms of the Drawdown and Rollover Notices.
2. A relevant Event of Default only arises under the terms of the facility agreements if a Lender gives notice of the matters that unless remedied within the time specified in the agreement (15 Business Days) would amount to an Event of Default. That is, notice and a failure to cure are essential prerequisites for there to be an Event of Default. In particular, it is only an Event of Default if a representation made in the facility agreements is untrue, incorrect or misleading if (1) it is untrue, incorrect or misleading in a material manner; (2) the Lender acting reasonably forms the view that the consequences constitute a Material Adverse Effect; and (3) such consequences are not remedied within 15 Business Days (as defined in the facility agreements) of receipt of a notice from the lender requiring "such remedy". Similarly, it is only an Event of Default if there is a change in financial position that has a Material Adverse Effect if the situation is not remedied within 15 Business Days of being required to do so by notice from the Lender. It is common ground that no notice was given and therefore that no relevant Event of Default occurred.
3. The Anchorage Plaintiffs contend, however, that the representation to the effect that there was no Event of Default extends to a representation that there was no Potential Event of Default. A "Potential Event of Default" is defined to mean "any event, thing or circumstance which will [sic] the giving of notice, the passage of time, or both, would become an Event of Default". The result, according to the Anchorage Plaintiffs, is that the No Event of Default Representation was breached by changes that had a Material Adverse Effect.
4. Two points may be made about that submission. First, even if it is correct, it is not clear what the No Event of Default Representation adds to the MAE Representation. Secondly, and more significantly, in my opinion the submission rests on a misunderstanding.
5. The No Event of Default Representation is to be found in cl 14.1(k) of the Morgan Stanley Facility Agreement and its equivalents. Clause 14.1(k) contains a representation to the effect that "no Event of Default or (except when this representation is repeated) Potential Event of Default, has occurred or continues unremedied". In other words, when the No Event of Default Representation is repeated by the terms of the facility agreements it is made only in respect of actual and not potential Events of Default. A similar analysis applies to representations made in the Drawdown and Rollover Notices. The representation contained in those notices is only made in relation to representations required to be repeated by cl 14.3 and its equivalents. Clause 14.3 picks up the representation in cl 14.1(k), but when repeated that representation is limited to actual Events of Default. The result is that the Drawdown and Rollover Notices only contain a representation in relation to actual Events of Default. Accordingly, any representations made in the Drawdown Notices in relation to Events of Default that might have arisen from a Material Adverse Effect were true. There was no Event of Default in relation to a Material Adverse Effect because no notice was given.
6. For these reasons, nothing further needs to be said about the No Event of Default Representation.

The claim against the signatories to the Drawdown Notices in negligence

Introduction

1. The signatories to the Drawdown and Rollover Notices were Ms Verawati, Ms Hall, Ms Lieu and Ms Sparkes. Ms Verawati was Operations Manager in the Treasury group. Her responsibilities included assembling regularly updated financial reports and forecasts from each of the general managers of Arrium's individual businesses for review by Ms Sparkes, monitoring compliance with financial covenants and preparing Drawdown and Rollover Notices. She reported to Ms Sparkes and obtained instructions from Ms Sparkes each week about which facilities should be drawn down, rolled over or repaid. Ms Lieu reported to Mr Brooks, and Ms Hall reported to Ms Lieu. Ms Lieu's responsibilities included the preparation and consolidation of monthly management accounts and half year and full year statutory financial statements and assisting with figures to be included in the monthly CFO's report to the board. Ms Hall was one of a number of employees who assisted Ms Lieu. Ms Hall and Ms Lieu's role relevantly was to sign Drawdown and Rollover Notices when Ms Sparkes was not available. None of Ms Verawati, Ms Hall or Ms Lieu gave evidence, although each swore affidavits for the purposes of the proceedings. As I have said, Ms Sparkes was the Group Treasurer until her resignation took effect on 29 January 2016. She had been in that position since November 2011. She did give evidence in the proceedings.
2. The Anchorage Plaintiffs put their claims against the signatories to the Drawdown Notices in two ways. First, they claim that the signatories owed the Par Lenders a duty of care in completing and signing the Drawdown and Rollover Notices. Second, they say that the signatories personally made the representations contained in the Drawdown Notices and owed the Par Lenders a duty of care in making those representations. According to the Anchorage Plaintiffs, the signatories breached both duties because they did not take reasonable care in completing the Drawdown Notices and, in particular, in checking that the representations that they contained were accurate.

Was the MAE Representation made in the Drawdown and Rollover Notices?

1. A preliminary question raised by Ms Verawati, Ms Hall and Ms Lieu is whether the MAE Representation was made by the Drawdown and Rollover Notices. The argument is not easy to follow. They point out that under the terms of the facility agreements the MAE Representation is only made by the "Parent" (that is, Arrium itself). Consequently, the MAE Representation, when repeated by the terms of the facility agreements, is only made by the Parent. On the other hand, the Drawdown Notices are given by the actual borrower (usually, Finance or AIOH) and the representations in those notices are made by "We". The representations and warranties made in the Drawdown Notices are the representations and warranties in the facility agreements which are required to be repeated. There is a question whether "We" is a reference to the borrower or the signatories to which it will be necessary to return. It is not, however, a reference to the Parent - the only entity that gives and repeats the MAE Representation under the facility agreements. Accordingly, so it is said, the MAE Representation is not made in the Drawdown Notices.
2. In my opinion, that conclusion does not follow. There appears to be a disconnect between the terms of the facility agreements and the terms of the pro forma Drawdown Notice (contained, for example, in Schedule 3 of the Morgan Stanley Facility Agreement). But I do not think that it follows that the MAE Representation is not made in the Drawdown Notices at all. Rather, the position is that the "We" who make the representations in the Drawdown Notices represent that the representation made and repeated by the Parent by force of the facility agreements in relation to material adverse changes also, by the Drawdown Notices, make that representation. The result is that the representations in the Drawdown Notices are not a simple repetition of the representations in the agreements. In the case of the MAE Representation, the representation is made by Parent in the agreements and by the "We" in the notice. The result is not that the MAE Representation is not made at all in the notices.

Were Ms Verawati, Ms Hall and Ms Lieu Authorised Officers?

1. In their written submissions, Ms Verawati, Ms Hall and Ms Lieu seek to make much of the fact that they were not Authorised Officers at the time they signed the Drawdown and Rollover Notices. However, accepting that they were not, it is difficult to see how that assists their case. They still signed the notices and made whatever representations they made by doing so whether they were Authorised Officers or not. The only consequence if they were not Authorised Officers is that it may have been open to the relevant Arrium Entity to argue that it was not bound by the notices that only they signed. That, in turn, might have given rise to a question whether the signatories were liable for breach of a personal warranty of authority. They, however, are not issues in the case.

Did the signatories owe the Par Lenders a duty of care?

1. There is a degree of unreality in the contention that the conduct of the signatories can be separated into its component parts for the purpose of identifying the conduct in respect of which a duty of care is said to be owed and in the suggestion that seems to be implicit in the Anchorage Plaintiffs' submissions that somewhat different principles apply depending on the precise conduct in respect of which it is said the duty is owed. In substance, the complaint of the Anchorage Plaintiffs is that the Par Lenders suffered harm because they relied on the representations contained in the Drawdown and Rollover Notices in advancing money to, and rolling over loans owed by, the Arrium Entities and that the signatories owed the relevant Par Lenders a duty to take reasonable care to avoid that harm because of their involvement in the making of those representations. Understood in that way, the making of the representations is a critical component of the conduct, and the question must be whether the signatories owed a personal duty of care in connection with the making of those representations.
2. The circumstances in which a party owes a duty to take reasonable care in making a representation were described in these terms by Brennan J in San Sebastian Pty Ltd v The Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340 at 372, referring to the judgment of Barwick CJ in Mutual Life & Citizens' Assurance Co Ltd v Evatt (1968) 122 CLR 556 at 571 (which itself was approved by Mason J (with whom Aitkin J agreed) in Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225 at 251 and by Gleeson CJ, Gummow and Hayne JJ in Tepko Pty Ltd v Water Board (2001) 206 CLR 1; [2001] HCA 19 at [47]): Where a representor gives information or advice on a serious or business matter, intending thereby to induce the representee to act on it, the representor is under a duty of care in giving that advice or information if three conditions are satisfied. First (corresponding with the first condition expressed by Barwick CJ), if the representor realizes or ought to realize that the representee will trust in his especial competence to give that information or advice; second (corresponding with the third condition), if it would be reasonable for the representee to accept and rely on that information or advice; and third (applying the underlying principle of the law of negligence), if it is reasonably foreseeable that the representee is likely to suffer loss should the information turn out to be incorrect or the advice turn out to be unsound.
3. Of course, it is not necessary that the representor be personally responsible for the communication of the information or advice to the representee. It is sufficient if the representation is contained in a document prepared by the representor and that the representor knew or ought reasonably to have known that the document would be distributed to and relied on by the representee. As Brennan CJ explained in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 at 252: In some situations, a plaintiff who has suffered pure economic loss by entering into a transaction in reliance on a statement made or advice given by a defendant may be entitled to recover without proving that the plaintiff sought the information and advice. But, in every case, it is necessary for the plaintiff to allege and prove that the defendant knew or ought reasonably to have known that the information or advice would be communicated to the plaintiff, either individually or as a member of an identified class, that the information or advice would be so communicated for a purpose that would be very likely to lead the plaintiff to enter into a transaction of the kind that the plaintiff does enter into and that it would be very likely that the plaintiff would enter into such a transaction in reliance on the information or advice and thereby risk the incurring of economic loss if the statement should be untrue or the advice should be unsound. [footnote omitted]
4. There is a question of how the principles of negligent misstatement fit with recent developments in the law of negligence generally and, in particular, the importance that vulnerability now plays in determining whether it is appropriate to impose a duty of care to avoid pure economic loss. In Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515; [2004] HCA 16, Gleeson CJ, Gummow, Hayne and Heydon JJ said at [23]-[24]: [23] Since Caltex Oil [Caltex Oil (Australia) Pty Ltd v The Dredge "Willemstad" (1976) 136 CLR 529], and most notably in Perre v Apand Pty Ltd, the vulnerability of the plaintiff has emerged as an important requirement in cases where a duty of care to avoid economic loss has been held to have been owed. "Vulnerability", in this context, is not to be understood as meaning only that the plaintiff was likely to suffer damage if reasonable care was not taken. Rather, "vulnerability" is to be understood as a reference to the plaintiff's inability to protect itself from the consequences of a defendant's want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant. … [24] In other cases of pure economic loss … reference has been made to notions of assumption of responsibility and known reliance. The negligent misstatement cases like Mutual Life & Citizens' Assurance Co Ltd v Evatt and Shaddock & Associates Pty Ltd v Parramatta City Council [No 1] can be seen as cases in which a central plank in the plaintiff's allegation that the defendant owed it a duty of care is the contention that the defendant knew that the plaintiff would rely on the accuracy of the information the defendant provided. And it may be … that these cases, too, can be explained by reference to notions of vulnerability. (The reference in Caltex Oil to economic loss being "inherently likely" can also be seen as consistent with the importance of notions of vulnerability.) It is not necessary in this case, however, to attempt to identify or articulate the breadth of any general proposition about the importance of vulnerability. This case can be decided without doing so. [footnotes omitted]
5. Commenting on those passages, Crennan, Bell and Keane JJ said in Brookfield Multiplex Ltd v Owners Strata Plan No 61288 (2014) 254 CLR 185; [2014] HCA 36 at [128]ff: In Woolcock Street Investments, the plurality noted that the exception to the general rule for negligent misstatement recognised in cases such as Mutual Life & Citizens' Assurance Co Ltd v Evatt and L Shaddock & Associates Pty Ltd v Parramatta City Council [No 1] depends on proof of an assumption of responsibility by the defendant and known reliance on the defendant by the plaintiff. … Further in this regard, the plurality in Woolcock Street Investments noted that in decisions such as Perre v Apand Pty Ltd, Hill v Van Erp and Esanda Finance Corporation Ltd v Peat Marwick Hungerfords , the concept of vulnerability could be invoked as the rationale explaining the exceptions to the general rule. Vulnerability, in this field of discourse, is concerned not only with the reasonable foreseeability of loss if reasonable care is not taken by the defendant, but also, and importantly, with the inability of the plaintiff to take steps to protect itself from the risk of the loss. …[footnotes omitted]
6. After quoting passages from Woolcock to the effect that a builder did not owe a duty of care to subsequent purchasers because those purchasers could have protected themselves from defects in the building through contractual warranties from the vendor who, in turn, could have obtained protection through warranties from the builder, their Honours continued (at [132]): These passages accord with the primacy of the law of contract in the protection afforded by the common law against unintended harm to economic interests where the particular harm consists of disappointed expectations under a contract. The common law has not developed with a view to altering the allocation of economic risks between parties to a contract by supplementing or supplanting the terms of the contract by duties imposed by the law of tort. [footnote omitted]
7. It is apparent from the decisions in Woolcock and Brookfield that the test summarised by Brennan J in San Sebastian remains important, if not critical, in determining whether a duty of care exists in respect of representations. But vulnerability is also an important factor which provides the basis for a reasonable expectation on the part of the representor that the representee places trust and reliance on the information conveyed by the representor and for a belief on the part of the representee that it would be reasonable to rely on that information.
8. In the present case a further question arises in relation to whether the signatories owed the Par Lenders a duty of care and that is whether they are to be understood as making the representations contained in the Drawdown and Rollover Notices personally or merely on behalf of the entity seeking the drawdown or rollover.
9. In general, the fact that an individual's conduct is conduct engaged in in the course of the individual's employment does not mean that the individual is not personally liable for that conduct. As the High Court explained in Houghton v Arms (2006) 225 CLR 553, [2006] HCA 59 at [40]: …As a general proposition, and as Lord Rodger of Earlsferry stressed in Standard Chartered Bank v Pakistan Shipping Corpn (Nos 2 and 4), in the world of tort the status of an individual as an employee does not divest that person of personal liability for wrongful acts committed while an employee. [footnote omitted]
10. One exception to this general principle is where the conduct of the employee can be regarded as purely ministerial. As Jacobson and Gordon JJ explained in Australian Securities and Investments Commission v Narain (2008) 169 FCR 211, [2008] FCAFC 120 at [96], in the context of a claim in respect of misleading and deceptive conduct in contravention of s 1041H of the Corporations Act, in answering the question whether a representor is personally responsible for a representation it is necessary to consider whether "all of the elements of the contravention are made out against the individual or whether he or she merely acted as a corporate organ, binding the company but not the person individually".
11. In the context of the law of negligent misstatement the question whether the representor owed a duty of care and the question whether the statement was made personally by the representor raise similar questions. In the present case, in substance the question is whether in all the circumstances of the case, the signatories are to be understood as taking personal responsibility for the statements made in the Drawdown Notices or whether they were merely the conduits by which those statements were made by the relevant company.
12. The context in which the representations were made is important. They were contained in Drawdown and Rollover Notices that formed part of a contractual mechanism by which Arrium could drawdown and rollover amounts borrowed by it under revolving credit facilities provided by the Par Lenders. The form of the notices, and the representations they contained, were specified by the relevant facility agreements; and the representations largely mirrored representations contained in the facility agreements themselves. They were one of a number of contractual obligations on Arrium negotiated by the Lenders to protect themselves against changes in the credit risk during the term of the relevant agreements. Others included an obligation on Arrium to provide its annual and half yearly accounts to the Lenders, a right on the part of the Lenders to serve a notice identifying a Material Adverse Effect and a right to terminate the facility on the basis that an Event of Default had occurred if the circumstances giving rise to the Material Adverse Effect were not rectified within the time specified in the facility agreements. They also included a right on the part of the Lenders to obtain additional financial information.
13. Two things follow from these points. The first is that the notices were given and the representations made as part of a contractual mechanism permitting drawdowns and rollovers to occur. The second is that Lenders could and did through the terms of the agreements protect themselves against errors in the Drawdown and Rollover Notices and in that sense they were not vulnerable to the consequences of a lack of reasonable care on the part of the signatories.
14. It is true, of course, that the Lenders may be worse off if the signatories are not liable in negligence to them, since they cannot recover any loss they may have suffered from the signatories and their insurers. But as I have explained, that is not the relevant test of vulnerability. The Lenders seek, through a claim in negligence, to hold the signatories liable in effect as guarantors of Arrium's obligations. In theory, it was open to the Lenders to negotiate to obtain those guarantees at the time they negotiated the terms of the facility agreements. In practice, it is unlikely that they would have been successful in doing so. Why, it might be asked, should the Lenders through a claim in negligence be entitled to obtain what was open to them to obtain, but which they were unlikely to have obtained, through contractual negotiations?
15. Arrium was a large public company. The requirement that Drawdown Notices be signed by an "Authorised Officer" who was appointed and identified in accordance with the facility agreements was an important mechanism by which the Lenders could be confident that notices given in accordance with the agreements were given by, and therefore binding on, Arrium. The requirement that the notices be signed by two representatives was a requirement of Arrium, not the Lenders or the agreements, and was, no doubt, a requirement put in place as an internal control mechanism.
16. The Anchorage Plaintiffs only relevantly sue on the MAE Representation. However, that does not alter the fact that if they are right, the signatories must personally have made all of the representations contained in the Drawdown and Rollover Notices. The signatories had no particular knowledge or expertise that enabled them to form a view on matters such as the solvency of the Arrium group or whether there had been a Material Adverse Effect. They had various levels of seniority within Arrium. Each of them could be expected to have knowledge of some aspects of Arrium's business but not the broad knowledge necessary to form a view on those questions. The most senior signatory was Ms Sparkes. As Group Treasurer, she had a detailed knowledge of some aspect of Arrium's business including its current need for funding and its expected cash flows. It is also apparent that Ms Sparkes had some knowledge of other aspects of the Strategic Review. It is unclear what knowledge she had of the progress of projects such as Project Jacaranda and Project Miwok. But it could not be suggested that the question whether a duty of care was owed and the question whether the signatories took on personal responsibility for the representations contained in the notices depended on who exactly signed the notices. The point is that the notices could be and were signed by persons who could not have been expected to have any particular knowledge or expertise to make what in effect were broad representations concerning Arrium's overall financial circumstances.
17. The Anchorage Plaintiffs submit that the notices were given, and the representations therefore made, by the signatories personally because the signed notices referred to "We", which must be taken to be a reference to the two signatories. I do not accept that submission. The actual notices differed in minor respects from the notice set out in the Schedules to the facility agreements to accommodate the fact that they were signed by two Arrium employees rather than one, as the agreements and Schedules contemplate. In addition, the actual notices have been amended so that the first numbered paragraph reads "We give you irrevocable notice that [the name of the company rather than "we"] wish to draw down under the Facility Agreement …". That amendment appears to have been made by someone who misunderstood the drafting of the pro forma notice set out in the Schedules. However, none of the parties could have thought that the notices that were signed would have some different legal effect from the effect of notices given in accordance with the agreements. It is apparent that the notices required to be given in accordance with the agreements were notices given by Arrium and not the individual signatories. The reference to "We" is obviously intended to be a reference to the entity seeking to draw down (or roll over a loan made) under the facility and not to the individuals signing the notice. It is the Arrium Entity seeking to draw down on the facility that is giving the irrevocable notice. That is made clear by the fact that the notices are signed "for and on behalf of" that entity. Similarly, when the pro forma notice states that "we" have taken or propose to take the remedial action specified in the notice, the reference to "we" must be a reference to the entity on whose behalf the notice is given. It cannot be a reference to the signatories.
18. Moreover, under the terms of the notice, the "We" referred to in the notice "represent and warrant" the matters that follow. That formulation follows the one contained in the facility agreements. It is plain from those words and the balance of the paragraph by which the representations and warranties are given that the warranties are intended to be absolute ones. The representations and warranties are breached, and the Lenders are entitled to their contractual rights arising from a breach, if objectively any of the representations made by the notice were false. Those facts strongly suggest that the representations and warranties were given by the corporate entities, not the signatories. The parties could not have intended that the signatories themselves were giving personal warranties concerning the absolute truth of the representations contained in the notices, but that is the effect of the interpretation contended for by the Anchorage Plaintiffs.
19. If a personal duty of care were owed by the signatories that would place them in a difficult position. Their signatures were required as part of a contractual mechanism which permitted Arrium to drawdown and rollover loans. As part of that mechanism, Arrium was required to make certain representations, but the individuals were not. If the Anchorage Plaintiffs are correct, the signatories were either forced to incur potential personal liability by signing the notices or risk breaching their duties as employees by refusing to sign notices that they had been requested to sign in accordance with the terms on which they were employed.
20. Having regard to those matters, I am not satisfied that the signatories owed a duty of care in relation to the representations contained in the Drawdown and Rollover Notices. That is so for two broad and related reasons. First, I do not accept that the representations and warranties were made and given by the signatories. They were made and given by the borrowing entity. Second, to use the traditional language of negligent misstatement, I do not think it could be said that the signatories realised or ought to have realised that the Lenders would be relying on their personal knowledge or expertise in making the representations. For the reasons I have given, they would have expected the Lenders to treat the representations as having been made by the relevant Arrium Entity. Nor do I think that it was reasonable for the Lenders to accept and rely on the representations as representations made by the signatories. They understood that the representations were being made as part of the contractual process by which Arrium could drawdown or rollover loans. There was nothing about the signatories which would have caused the Lenders to rely on what they said other than the fact that they were authorised to bind Arrium. As I have explained, the Lenders were not relevantly vulnerable to a failure by the signatories to take reasonable care. For similar reasons, the Lenders could not have understood that the representations were being made by the signatories personally.
21. It follows that the claim that the signatories owed the Lenders a duty of care must fail.

Breach

1. The case in relation to breach is essentially that none of the signatories turned her mind to the question whether the MAE Representation was true and, if she did, undertook reasonable enquiries to find out whether it was true.
2. There are a number of difficulties with that case. The Anchorage Plaintiffs give no indication of what enquiries the signatories ought to have undertaken. It does not appear to be suggested that the signatories ought to have undertaken their own factual enquiries and formed their own views, based on those enquiries, on whether there had been a change in Arrium's financial position that constituted a Material Adverse Effect. Nor could there be. That would require the signatories to become familiar with aspects of Arrium's financial position that were outside their areas of responsibility and to form opinions on the effect of any changes that had occurred since the date up until when the last set of published accounts were prepared (or 31 December 2012, in the case of the 2013 SFA) on Arrium's ability to comply with its obligations under the facility agreements. It would be unreasonable to place those obligations on the signatories.
3. There is a suggestion in some of the Anchorage Plaintiffs' submissions that the signatories, particularly Ms Sparkes, had knowledge of matters relevant to the question whether there had been a Material Adverse Effect. The Anchorage Plaintiffs point to the following evidence given by Ms Sparkes: Q. Come back to my question. You say you recall forming the view that the financial position of the group as at December 2015 and January 2016 was different to the financial position of the group as at 30 June 2015; that's right so far? A. Yes. Q. You thought that the change was negative, I think you indicated? A. Yes. Q. In what respects did you assess the position was negative? Now, I'm not asking about what you told anybody; I'm just asking you about your assessment as to how and why the change was negative. Can you answer that question for me? A. The iron ore price had fallen quite a lot. We weren't making money out of the mining business any longer. That was affecting us, as was the copper price at the time. That was affecting our profit. Steel was actually doing okay, but, yes, I was aware of factors affecting our profit at the time. Q. The financial position of the group which you considered, these were the causes, I think you've identified, of the negative impact? A. Yes. Q. What were the consequences, so far as the financial position of the group by reason of those causes, as you assessed it at the time? A. Obviously it was having a negative impact on EBITDA and cash working profits, and cash flow, because mining used to be quite cash positive. There hadn't been a writedown at that stage on the balance sheet for - well, I don't know if there had been a writedown at that stage. There were various things that I would understand at the time to be negative on our performance. [T1129-30]
4. The Anchorage Plaintiffs also submit that Ms Sparkes was aware that the change in financial position adversely affected Arrium's ability to perform its obligations. That awareness was to be inferred from the following: 1. Ms Sparkes' comments in an email dated 21 September 2015 to Mr Bakewell on a document entitled "Lender Consideration Overview" in which she said, among other things: 1. "If Columbus is proceeding believe it is best to communicate with banks as a matter of urgency. I don't want to think that we can trick them into being a lender for longer. Treat them as an important stakeholder. Not right to ledge them. Ask for support for Marco. Present Marco financials and Archer style proposal"; and 2. "Can't avoid contact for 6 months then re-engage, not practical, unless you have no treasurer …" 1. An email sent to Ms Sparkes on 2 December 2015 enclosing a proposal suggesting that a whole of company refinance of Arrium's existing debt would require a "haircut" to existing Lenders' debt in the order of 30 percent, which she accepted in cross-examination gave rise to some concern; 2. Other material which suggested that Ms Sparkes was aware of a proposal that the Lenders take a haircut of at least 35 percent; 3. Material that suggested Project Columbus could only occur if Arrium obtained a sufficiently high sales price to ensure the viability of the remaining businesses. It was also suggested that Ms Sparkes was aware by January 2016 that such a price would not be achieved, although the Anchorage Plaintiffs do not refer to any evidence that would support that conclusion; 4. An email Ms Sparkes sent to Mr Edler very early on the morning of 8 December 2015 in which she asked about the effect that liquidation would have on Arrium's trade insurance; and 5. The fact that Ms Sparkes was eager throughout December 2015 to be removed as a director of the subsidiary companies, which indicated that she was aware of "Arrium's perilous financial position".
5. Also relevant to this issue is the following evidence given by Ms Sparkes: Q. Do you agree that you were in a position to assess the group's financial position? I'll start again. Insofar as the no material change representation referred to the group's financial position, and the expression "no change in the group's financial position", did you regard yourself as in a position in December 2015 and January 2016, to assess whether there had been such a change, as referred to in the clause? A. Only by reference to the covenants compliance. Q. And that's it? A. That was an indicator.
6. Relying on less evidence, the Anchorage Plaintiffs make similar submissions in relation to Ms Verawati, Ms Hall and Ms Lieu.
7. A fatal problem with these submissions is that they go well beyond the pleaded case. The pleaded case is that the signatories were negligent because they did not make adequate enquiries. On the other hand, these submissions are directed at establishing that the signatories, or at least Ms Sparkes, knew that there had been a change in financial position that had a Material Adverse Effect. As the defendants point out that allegation is an allegation of fraud. If it was to be made it should have been properly pleaded and particularised.
8. In any event, the evidence does not establish that Ms Sparkes (or the other signatories for that matter) knew enough to make a proper assessment of whether the changes in financial position that she accepts occurred had a Material Adverse Effect. At most the evidence establishes that Ms Sparkes, unsurprisingly, knew that there had been a deterioration in Arrium's financial position and that Arrium was investigating various strategies to deal with its debt, particularly its debt maturing in July 2017. She certainly could not know in December 2015 that Arrium would not achieve an acceptable price for Mining Consumables. The most that could be said was that she appreciated that the risk that Arrium would not obtain an acceptable price in the near future had increased. In order to make good the case that Ms Sparkes knew that the MAE Representation was not true, it would be necessary for the Anchorage Plaintiffs to identify the change they rely on by comparing the relevant accounts, to prove that Mr Sparkes was aware of that change and to explain how that change or those changes in combination had a Material Adverse Effect and why Ms Sparkes was aware of that effect. They have not done that. The only concession that Ms Sparkes made was that she was in a position to make an assessment in relation to changes in the financial covenants contained in the facility agreements.
9. The Anchorage Plaintiffs' case appears to be that the signatories ought to have made enquiries of someone in authority and in a position to know whether changes in Arrium's financial position had had Material Adverse Effect before signing the Drawdown and Rollover Notices. Their negligence was in failing to turn their minds to that question and make those enquiries. But it is not apparent why the onus was on the signatories to make those enquiries and why they were not entitled to rely on those in authority (presumably, Mr Bakewell, Mr Roberts or the board) to tell them if and when the representations could no longer be made or required qualification. The drawing down and rolling over of amounts under the facilities was part of Arrium's normal business. It is to be expected that those in senior management, such as Mr Bakewell and Mr Roberts, would be aware that Arrium's Treasury would manage that activity in accordance with Arrium's Treasury Policy unless they were told otherwise. It is also to be expected that senior management would have been aware of the fact that Arrium was not in a position to drawdown on its loans if there was a change in financial position that had a Material Adverse Effect. It was at least apparent to the signatories that Arrium had embarked on a Strategic Review and that as part of that review the board was considering a number of options to deal with Arrium's obligations under the banking facilities. Although the signatories may have had a general idea of what those options were and what progress had been made in relation to them, there is no evidence that all of the details of them were known outside of those who attended board meetings. Accordingly, it was the board and Mr Roberts and Mr Bakewell who were in the best position to assess whether any changes in Arrium's financial position had a Material Adverse Effect. Consequently, it would have been reasonable for the signatories to be expected to be told that Arrium was no longer in a position to make the MAE Representation if that was the view the board, or Mr Roberts or Mr Bakewell's view. It follows that they were not negligent in not making those enquiries.

Causation

1. Section 5D of the Civil Liability Act 2002 (NSW) provides: (1) A determination that negligence caused particular harm comprises the following elements - (a) that the negligence was a necessary condition of the occurrence of the harm (factual causation), and (b) that it is appropriate for the scope of the negligent person's liability to extend to the harm so caused (scope of liability). (2) In determining in an exceptional case, in accordance with established principles, whether negligence that cannot be established as a necessary condition of the occurrence of harm should be accepted as establishing factual causation, the court is to consider (amongst other relevant things) whether or not and why responsibility for the harm should be imposed on the negligent party. (3) If it is relevant to the determination of factual causation to determine what the person who suffered harm would have done if the negligent person had not been negligent - (a) the matter is to be determined subjectively in the light of all relevant circumstances, subject to paragraph (b), and (b) any statement made by the person after suffering the harm about what he or she would have done is inadmissible except to the extent (if any) that the statement is against his or her interest. (4) For the purpose of determining the scope of liability, the court is to consider (amongst other relevant things) whether or not and why responsibility for the harm should be imposed on the negligent party.
2. In this case, factual causation cannot be made out for at least three reasons.
3. First, if any of the signatories had made enquiries of Mr Bakewell (who seems the obvious candidate of whom enquiries would be made), they would have been told on each occasion that the representation could be made. That is clear from the fact that when HSBC refused to fund a Drawdown Notice issued by Arrium on 11 February 2016 and signed by Ms Hall and Ms Verawati, Mr Bakewell and Mr Brooks signed a Drawdown Notice confirming that the representations and warranties made in the Drawdown Notice were true.
4. Second, for the reasons I have given, at least until 11 February 2016 the representation was true on each occasion on which it was made.
5. Third, there is the question of reliance. The issue of reliance is important both to the question whether a duty of care existed and to the question of causation. It is the Anchorage Plaintiffs' case that the Par Lenders were caused harm by the MAE Representation because they relied on it in advancing or rolling over the relevant loans.
6. The Anchorage Plaintiffs led no evidence of reliance. Absent any evidence of reliance, I am not satisfied that the Par Lenders relied on the representations made by the signatories. The Anchorage Plaintiffs submit that reliance can be inferred because the giving of the notices was an essential step in the process by which loans were made or rolled over. However, that submission focuses on the wrong issue. I accept that the Lenders relied on the Drawdown and Rollover Notices in making or rolling over the loans. The question, however, is whether they relied on the representations said to be made by the signatories in those notices or whether, for example, they relied solely on the fact that the notices were given in accordance with the relevant facility agreement and the warranties were given by the entity seeking to make the drawdown. That raises the question whether the Lenders paid any attention to the representations contained in the Drawdown Notices. It also raises the question of what it was about representations made in a personal capacity by the individuals who signed the Drawdown Notices that caused the Lenders to advance or rollover funds - in the sense that but for those personal representations they would not have done so.
7. There is substantial evidence that the Lenders were aware of Arrium's deteriorating financial position and that the sale of Mining Consumables for an acceptable price was essential if the Lenders were to be repaid in accordance with the terms of their respective facility agreements. The Lenders knew that if that did not occur, it would be necessary to reach some agreement with Arrium to vary the terms of the facilities. A number wanted to know the outcome of the sales process before negotiating such an agreement. It was for that reason that Project Archer was put on hold.
8. The Lenders were aware of the change in Arrium's financial position between FY14 and FY15. By about October 2015, a number of Lenders had placed Arrium on a watchlist or equivalent and transferred the file to the asset management or similar group within the Lender to monitor Arrium's financial position and closely manage the loans owed by it. The evidence is that one or more of Mr Roberts, Mr Bakewell, Ms Sparkes and Ms Pearce met with representatives of most if not all the Lenders during the period from October 2015 (and before) and January 2016 (in the case of HSBC, 17 February 2016). It is to be expected that at those meetings, the Lenders would have had an opportunity to ask questions about Arrium's financial position.
9. Most, if not all, of the Lenders must have appreciated throughout the period during which the relevant drawdowns and rollovers were made, that there was a risk that they would not be repaid in full, particularly if the sale of Mining Consumables did not proceed for an acceptable price. That conclusion is supported by the internal records of a number of the Lenders. The file note made by NAB following the meeting with Mr Roberts and Mr Bakewell on 8 December 2015 (quoted in para [101] above) is an example, as are the minutes of a meeting of BOC's credit committee held on the same day (referred to in para [103] above). It is apparent that many, if not all, the Lenders took the view that their best chance of being repaid in full was to continue to support Arrium until the outcome of the sale process was known and Arrium's financial prospects became clearer. Ms Verawati, Ms Hall and Ms Lieu's submissions refer to a number of internal Lender documents which support that conclusion. So for example, an internal HSBC credit memorandum dated 18 December 2015 states: While there is concern regarding the existing exposures and a general reluctance to increase our exposure, the retention of trade lines limits and the ability to issue new trade instruments is considered essential to ensure that the MC [Moly-Cop] sale process is not undermined.
10. Similarly, BBVA in a loan review dated 28 January 2016 stated: Next month, Arrium will release its Intermin [sic] Financials for the HY results of the FYE Jun 2016. Currently, the Company is in a difficult financial situation due to its high dependence on the iron ore price, which has decreased by more than 40% in the last year. And later: NEXT STEPS ● We will monitor closely the news regarding the sale of the Moly-Cop business. The market value of the Company can be close to the current Net Debt of Arrium (AUD 1.75 Bn) although the last rumors pointed to some insufficient debr ● Arrium will release its interim Half Year Results during next month (17 Feb). We will analyze the Company's performance during the first 6 months of FYE Jun 2016. ● With iron ore prices still low, the near-to-medium term challenge for Arrium will be to remain above its 3.0-3.5x EBITDA/Interest covenant, and to generate enough cash flow to pay down a meaningful level of debt.
11. But the clearest evidence of the attitude of the Lenders was the position they took after the sale of Mining Consumables fell through. On 16 February 2016, HSBC refused to advance funds which were the subject of a Drawdown Notice, notwithstanding the representations contained in the notice. On the other hand, all but one of the Lenders indicated a willingness in principle to advance further funds if necessary if Arrium terminated its agreement with GSO. It seems clear that the Lenders were making their own assessment of Arrium's financial position and what was in their best interests in the circumstances. They were not relying on the truth of the MAE Representation in making that assessment.
12. Moreover, there is no evidence that the Lenders relied on any representation made by the signatories personally. No argument is advanced which explains what it was about the signatories personally and what they did and said that caused the Lenders to advance or to rollover funds because the representations were made by them, rather than the corporate entity alone. There is no evidence that anyone from any of the Lenders attached any significance to who actually signed the notices. Indeed, the evidence seems to be that none of the Lenders even checked to see whether the signatories were Authorised Officers. The true position is that the signatories were simply fulfilling a ministerial function the effect of which was (assuming they occupied the position they claimed to have) that the relevant Arrium Entity was conclusively bound by the relevant notice and the consequences that followed from what it contained.
13. It follows that the case on causation must also fail.

The claims against the signatories for misleading and deceptive conduct

1. The claims against the signatories for misleading and deceptive conduct are only brought by CBA and DB insofar as they bring their claims as Par Lenders. It raises similar questions to the claim in negligence.
2. To adapt the words of Jacobson and Gordon JJ in Australian Securities and Investments Commission v Narain (2008) 169 FCR 211, [2008] FCAFC 120 at [96], the question is whether all the elements of a contravention are made out against the signatories or whether they merely acted as a corporate organ. In order to make out a contravention of the relevant provisions, it was necessary for the Anchorage Plaintiffs to prove, among other things, that the signatories personally engaged in misleading or deceptive conduct - that is, that they personally engaged in conduct that had a tendency to lead CBA and DB into error: see Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640, [2013] HCA 54 at [39].
3. In my opinion, this is a case where the signatories merely acted as a corporate organ, and their own conduct could not be said to have a tendency to lead the Lenders into error. I have already explained my reasons for reaching that conclusion. The signatories signed the Drawdown and Rollover Notices in accordance with a requirement contained in the relevant facility agreements as a mechanism by which drawdowns and rollovers were made and as a means by which the relevant Arrium Entity became bound by the notices. There was nothing about the relationship of the signatories to the Lenders or their knowledge of the affairs of Arrium that suggested that they were making some representation to the Lenders personally. On the proper construction of the notices, the representations and warranties by their terms were expressed to be made by the relevant Arrium Entity. The representations and warranties were expressed in absolute terms. That may have been appropriate for representations made by the Arrium Entities in the context of the facility agreements. However, CBA and DB could not have understood that the signatories by signing the notices were giving what were in effect personal promises that the representations were true - and were true not just at the time the representations were made, but were also true at the time the drawdowns or rollovers occurred.
4. If the representations were made by the individuals, a further issue that arises is whether they should still be treated as absolute representations of fact. It may be appropriate to do so where the representations are treated as contractual representations made by the relevant companies. As I have indicated, it seems less appropriate to do so if the representations are treated as personal representations by the signatories. The representations involved difficult questions of judgment concerning Arrium's financial position. Were the signatories really to be understood as making absolute representations concerning those matters rather than expressing an opinion on the basis of what they knew? The Anchorage Plaintiffs do not explain why that question should be answered in the affirmative. And if it is answered in the negative, the case based on the statutory prohibitions raises similar questions to the negligence claim. In particular, it raises the question of why it was not reasonable for the signatories to assume that they would be told by those responsible for making the relevant assessments, such as the board, if the representations could no longer be made.
5. Moreover, even if it is accepted that the representations were absolute ones for the purposes of the statutory prohibitions at the time they were made, they could not be treated as absolute ones at the time the drawdown or rollovers occurred. The representations were made at the time the relevant notices were issued. To the extent that they were representations concerning what the position would be at the time of actual drawdown or rollover, they were representations concerning the future. Representations of that type are misleading or deceptive if the representor did not have a reasonable basis for making them: see ACL, s 4; ASIC Act s 12BB; Corporations Act, s 769C.
6. In most cases, the distinction is not important in this case on any view because corresponding representations of fact were made a few days earlier. However, on the findings I have made, it could be important in relation to rollovers that occurred on 12 February 2016 and possibly 11 February 2016 (the position on that day may be affected by the precise time the board considered the issue). I have concluded that there was a change in financial position constituting a Material Adverse Effect on 11 February 2016 because on that date the board appears to have accepted that a note should be included in the HY16 Accounts concerning Arrium's solvency. However, that is not sufficient to establish that the representations made in the relevant Rollover Notices were misleading or deceptive. Rather, it would have been necessary for the Anchorage Plaintiffs to prove that, on the date the Rollover Notices were issued, the signatories did not have reasonable grounds for making the representations concerning the position as at the date the relevant rollover was to occur. That turns on whether the signatories could reasonably have anticipated that the board would accept inclusion of the note concerning solvency on or prior to 11 February 2016. Those issues were not addressed in submissions and having regard to the other conclusions I have reached do not arise. Consequently, it is undesirable and unnecessary to express a final view on them.
7. As to reliance and causation, the claims for misleading and deceptive conduct raise similar issues to those raised by the claim in negligence. For the same reasons, CBA and DB have failed to prove that any contravention caused them loss.

Introduction

1. Two additional claims are made against Ms Sparkes. First, it is said that she was negligent in making a number of representations on 31 December 2015 to Morgan Stanley. Second, it is alleged that Ms Sparkes had accessorial liability for (1) breach of contract by the Arrium Entities; (2) negligence on the part of Arrium Entities in making the representations in the Drawdown Notices, the representations made by reason of the terms of the relevant facility agreements and the representations made by Ms Sparkes on 31 December 2015; (3) misleading and deceptive conduct by the Arrium Entities in making the representations referred to in (2) to the extent that those representations were made to CBA and DB as Par Lenders.

The claim in negligence

1. For reasons which are not apparent, the Anchorage Plaintiffs frame the claim they make against Mrs Sparkes in connection with the representations she is alleged to have made during the telephone conversation on 31 December 2015 in negligent misstatement and negligence, as if they were separate causes of action. That is not the case. There is one cause of action in negligence arising from statements made by Ms Sparkes during the course of the telephone conversation. The principles that apply to that cause of action are discussed earlier in this judgment.
2. The representations said to have been made by Ms Sparkes on 31 December 2015 to Morgan Stanley were: 1. She was comfortable with the representations made in the Drawdown Notice dated 29 December 2015; 2. Finance and AIOH would be in compliance with the covenants under the Morgan Stanley Facility Agreement as at December 2015; 3. They were comfortable with all of the representations made under the Drawdown Notice; 4. The sale process for Mining Consumables was still ongoing with the aim to have a result by the end of January 2016; 5. If the sale process for Mining Consumables fell through, restructuring with the banks would be "Plan B'; 6. Finance would negotiate with the Lenders and explore different options, including the offering of security for lower covenant levels; 7. Ms Sparkes was confident that the Arrium Group would get to a cash flow positive position; 8. The express representations she made and the representations made in the Drawdown Notice contained no material omissions and did not need to be "qualified and/or conditioned" (defined by the Anchorage Plaintiffs as the No Omissions Representations).
3. Before dealing with the individual representations, it is necessary to say something about the claim generally.
4. First, the onus is on the Anchorage Plaintiffs to prove that the representations were made. Courts have repeatedly stressed that, in the case of oral representations, the conversation "must be proved to the reasonable satisfaction of the court which means that the court must feel an actual persuasion of its occurrence or existence" (to quote from the judgment of Hammerschlag J in John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451 at [94]). Underlying that requirement are two considerations. The first is the fallibility of human memory, affected as it is by the passage of time and the distortions that arise from personal involvement in the relevant events. The second is that the words used and the context in which they were spoken are important because subtle differences in language and context can have a substantial effect on the meaning the words convey.
5. Second, in the present case, the Anchorage Plaintiffs rely entirely on a file note recording, and an email reporting on, the conversation. Those documents would provide important corroborating evidence of a witness who gave evidence of the conversation. However, they are a poor substitute for testimony of a person who participated in the conversation because they are hearsay and there is no possibility of testing with a witness to the conversation whether the written words accurately convey the meaning of what was said. That point is particularly relevant to internal emails and file notes, which are often prepared without a great deal of thought.
6. Third, although Ms Sparkes said that she could not deny that she made a number of the statements attributed to her, her inability to deny those statements is not equivalent to an admission that they were made. The onus remains on the Anchorage Plaintiffs to prove that Ms Sparkes made the statements. In some cases, Ms Sparkes makes what appear to be admissions that she said things attributed to her, particularly in the email. The most significant example, which is relied on by the Anchorage Plaintiffs, is quoted in para [150] above. But that admission must be treated with caution. It is plain from Ms Sparkes' evidence that she could not recall the conversation. Nor was she in a position to deny that the email represents an accurate record of the effect of what she said. But it does not follow from that that she admits she said those things. She was not in a position to make that admission.
7. I accept that Ms Sparkes owed Morgan Stanley a duty of care in making any representations she did during the telephone conversation. The telephone conversation had been requested by Morgan Stanley so that it could better understand Arrium's financial position and the reasons behind the drawdown request. Ms Sparkes accepted in cross-examination that she regarded the conversation "as a matter of importance". She must have understood that Morgan Stanley wanted some additional information concerning the drawdown request before agreeing to it. It was reasonable for Morgan Stanley to rely on what it was told by Ms Sparkes. She occupied a position of some seniority and was the person immediately responsible for issuing the Drawdown Notice. It was reasonable of Morgan Stanley to expect that Ms Sparkes would either know or be in a position to find out the additional information it wanted to know. It had no other means of finding out the information itself, and in that sense it was vulnerable to a lack of reasonable care on Ms Sparkes' part.
8. I am not satisfied that the representation referred to in para (a) was made. There is no reference in the file note to Ms Sparkes saying anything about the representations contained in the Drawdown Notice. If that had formed an important part of the conversation, it is to be expected that there would have been some reference to the representations in the file note. The email records Ms Sparkes as saying that "they are comfortable with all the reps made". It says nothing about Ms Sparkes. Absent any other evidence, the reference to "they" must be a reference to the Arrium Entities. Consequently, at most Ms Sparkes said words to the effect that the Arrium Entities were comfortable with making the representations contained in the Drawdown Notice. It is not entirely clear what "comfortable" means in this context, and it is unlikely that a statement to that effect was simply volunteered by Ms Sparkes. The email appears to summarise the author's recollection of the effect of what Ms Sparkes said, and whether "comfortable" was Ms Sparkes' word or the author's is unclear. At most, the email is evidence that Ms Sparkes said words to the effect that Arrium believed that the relevant Arrium Entity could make the representations contained in the Drawdown Notice and had reasonable grounds for that belief. The Anchorage Plaintiffs have not sought to demonstrate that a representation to that effect was false. Their submissions are directed at establishing the objective falsity of the MAE Representation, not to Ms Sparkes beliefs about the representation and her reasons for thinking that the Arrium Entities were comfortable making it.
9. As to the representation referred to in para (b), I accept that it is likely that Ms Sparkes did say something to the effect that Finance and AIOH would be in compliance with the Gearing Ratio and the ICR and under the Morgan Stanley Facility Agreement as at December 2015. She concedes that she did. They are two metrics specifically referred to in the facility agreement. It was the responsibility of Arrium's Treasury group to calculate the relevant ratios and they were obvious matters to mention in the context of a discussion about the Drawdown Notice. There is, however, no suggestion that the representation was false.
10. The representation referred to in para (c) is similar to the representation in para (a), except that it is a representation that "they" were comfortable. I am not satisfied that a representation was made in those terms. It was not referred to in the file note. The email may record a representation made by Ms Sparkes. It may, however, be a summary of the author's understanding of the effect of what Ms Sparkes said. Without more, it is not possible to be satisfied the email accurately records something that Ms Sparkes said. I have already explained why little weight can be placed on Ms Sparkes' apparent admission that it does. In any event, as I have said, the most that could be concluded from the email is that Ms Sparkes said words to the effect that the Arrium Entities believed that they could make the representations contained in the Drawdown Notice and had reasonable grounds for that belief. The Anchorage Plaintiffs have not explained why a representation to that effect was false.
11. As to the representation referred to in para (d), I am not satisfied that the representation was made by Ms Sparkes. The email simply records "Sales process is ongoing but not much else disclosed there". Morgan Stanley, and Mr Ball in particular, had considerable knowledge of Project Columbus because it (and he) were advising APRD, one of the bidders for Mining Consumables. It is unclear in that context whether the email was simply recording a fact already known to Morgan Stanley and stating that Ms Sparkes had nothing to add or whether it is recording a statement made by Ms Sparkes. In any event, the representation was plainly true.
12. The same is true of the representation referred to in para (e). The Lenders including Morgan Stanley knew that discussions with them had been put on hold pending completion of the sales process of Mining Consumables. The email may be recording that Ms Sparkes said that restructuring with the banks was "Plan B". But it could equally be recording something already known to Morgan Stanley and a statement by Ms Sparkes that Arrium had not yet started discussions with the main banks on Plan B. In any event, the representation was also plainly true.
13. The representation referred to in para (f) appears to be a statement of the obvious. In any event, it can be no more than a representation concerning what Ms Sparkes believed at the time. There is no suggestion that it was false.
14. The pleaded representation in para (g) does not correspond to what is set out in the email. The email states "further cost reduction talks with suppliers and potential mine plan change but she's 'confident' of getting to cash positive at current levels". It is not clear why the author of the email put "confident" in single quotes. It may be that the author was intending to signify that she was using the precise word used by Ms Sparkes, but it may be that the author was intending to convey some qualification to the use of the word. Nor is it clear what the reference to "current levels" is. It could be a reference to the current levels of cost reduction and the then existing mine plan. But it could also include the price for which Arrium was able to sell its products. The pleaded representation is concerned with the Arrium Group as a whole. However, the email is consistent with Ms Sparkes making a statement about the Mining Division alone. For those reasons, I am not satisfied that the pleaded representation was made. If the representation was made, it was plainly a statement of opinion by Ms Sparkes. It could only be false if Ms Sparkes did not hold the opinion or possibly did not have reasonable grounds for holding it. But again, the Anchorage Plaintiffs advance no reasons for why the Court should find either that Ms Sparkes did not hold that particular opinion or did not have reasonable grounds for doing so.
15. The Anchorage Plaintiffs' case in relation to the No Omissions Representations appears to be that Ms Sparkes did not qualify any of the representations she made or that were made in the Drawdown Notices and therefore she impliedly represented that no qualification was necessary and impliedly represented that the Drawdown Notice did not contain any omissions. I do not accept that the No Omissions Representations was made. Ms Sparkes participated in the conversation at Morgan Stanley's request to answer questions it had about the Drawdown Notice. It is difficult to see how any duty Ms Sparkes had extended beyond taking reasonable care in providing the information she gave in response to the questions that she was asked. There is no evidence that Ms Sparkes was asked a question that required her to disclose more than the evidence indicates she did. Nothing about the occasion could have led Ms Sparkes reasonably to believe that she was being relied on to volunteer more information than was responsive to those questions or that the Morgan Stanley representatives reasonably relied on Ms Sparkes to do more than answer them.
16. Moreover, the significance of the representation is unclear. The Anchorage Plaintiffs assert that it was false. The reasons are not clear, but presumably their case is that the representation amounts to a representation that the MAE Representation contained in the Drawdown Notice did not need to be qualified and that representation was false because the MAE Representation did need qualification because it was false. Put like that, the significance of the No Omissions Representations is that it is an absolute representation that the MAE Representation was true, in contrast to the express representation said to have been made by Ms Sparkes to the effect that the Arrium Entities "are comfortable" with the representations contained in the Drawdown Notice (including the MAE Representation). But if that is the Anchorage Plaintiffs' case, there are two problems with it. First, I have already concluded that the MAE Representation was not false at the time of the conversation. Second, I do not think that the inference on which the representation depends can be drawn. If the email recording what was said during the conversation is correct, Ms Sparkes said words to the effect that the Arrium Entities were comfortable making the representations in the Drawdown Notice, including the MAE Representation. How can it be inferred that Ms Sparkes impliedly made an unqualified representation during the conversation by her silence when she expressly made a qualified representation on the same subject-matter - namely that the Arrium Entities "are comfortable" making the representations? The Anchorage Plaintiffs say nothing that would provide a satisfactory answer to that question.
17. Having regard to the conclusions I have reached, it is unnecessary to address the question whether Morgan Stanley relied on what Ms Sparkes said during the course of the telephone conversation for advancing funds sought in the relevant Drawdown Notice, and there is a degree of unreality in attempting to do so. The most important representation was the representation to the effect that Arrium or the Arrium Entities were comfortable making the representations in the Drawdown Notice. It is not possible to consider the position solely on the basis that that representation was not made, since the MAE Representation was obviously made in the Drawdown Notice and it is doubtful that the drawdown would have occurred if the true position was that Arrium was not comfortable in making it. The real question in relation to reliance and causation is whether Morgan Stanley was inclined not to honour the Drawdown Notice before the conversation and whether Ms Sparkes said something during the conversation which either alone or together with other matters caused Morgan Stanley to change its mind. In my opinion, the Anchorage Plaintiffs have not proved that to be the case. The evidence suggests that Morgan Stanley had and thought that it had learned very little as a result of the conversation. As I have explained, Mr Ball in particular must have had considerable knowledge of Arrium's financial circumstances. It is apparent that its research arm prepared regular updates on Arrium's business. Ms Park said in her email that the conversation was "Not extremely helpful", which is likely to be something of an understatement. In the absence of any other evidence, I am not prepared to conclude that Morgan Stanley relied on anything Ms Sparkes said. The likelihood is that Morgan Stanley made its own assessment of Arrium's financial circumstances and the risks of honouring and not honouring the Drawdown Notice and, having received nothing of much assistance from Ms Sparkes, decided to honour it.

The claims based on accessorial liability

1. Each of the claims based on accessorial liability depends on an allegation that the Arrium Entities (or some of them) breached one or more duties they owed to the Par Lenders. Four types of breach and accessorial liability are identified. First, it is said that the Arrium Entities breached their obligations under the facility agreements and Ms Sparkes induced those breaches. Second, it is said that Finance and AIOH owed a duty to take reasonable care in relation to the MAE Representation made by the terms of the facility agreements and in the Drawdown and Rollover Notices, that they breached that duty of care and that Ms Sparkes procured those breaches. Third, it is said that the Arrium Entities engaged in misleading and deceptive conduct by making the MAE Representations made by the terms of the Morgan Stanley Facility Agreement and in the Drawdown Notices given to CBA and DB (insofar as they bring claims as Par Lenders) and Ms Sparkes was knowingly concerned in that conduct. Fourth, it is alleged that the representations made by Ms Sparkes on 31 December 2015 were made by the Arrium Entities, that they owed Morgan Stanley a duty to take reasonable care in relation to those representations, that they breached that duty of care and that Ms Sparkes procured those breaches.
2. The last of these allegations can be put to one side immediately. I have already found that Ms Sparkes owed Morgan Stanley a duty of care in relation to representations made by her during the course of the telephone conversation on 31 December 2015. Consequently, Ms Sparkes had primary liability for any breaches of duty arising from the representations made during that conversation. It may be that Arrium was also liable for the representations made by Ms Sparkes during the course of the conversation because those representations were made by Ms Sparkes as one of its employees. But in that case, the claim that Ms Sparkes had accessorial liability in respect of Arrium's conduct can add nothing to the claim that she was liable as principal, since Arrium's conduct was her conduct. And if, as I have found, Ms Sparkes either did not make or was not negligent in making any of the representations she is alleged to have made during the course of the conversation, then any claim against Arrium must also fail, as must any accessorial claim against Ms Sparkes.
3. The claim that Ms Sparkes induced the Arrium Entities to breach the terms of the facility agreements can also be put to one side. No submissions were advanced in support of the claim. As I have explained, a breach of the facility agreements could only arise because a representation and warranty was untrue, incorrect or misleading if the relevant Lender acting reasonably considered the consequences of those circumstances constituted a Material Adverse Effect and those consequences were not remedied within 15 Business Days of receipt of a notice from the Lender requiring that to be done. No such notice was given. Consequently, there was no breach arising from the fact (assuming it was a fact) that one or other of the representations and warranties was untrue. No other breach is identified.
4. In order to be liable, Ms Sparkes would knowingly and intentionally have to have induced the breach of the facility agreements, which would require Ms Sparkes to "know of the contract and sufficient of its terms to know that what [she] induced or procured [the Arrium Entities] to do would be in breach of the contract", to adapt the language of the New South Wales Court of Appeal in Fightvision Pty Ltd v Onisforou; Tszyu v Fightvision Pty Ltd (1999) 47 NSWLR 473; [1999] NSWCA 323 at [160]. See also LED Technologies Pty Ltd v Roadvision Pty Ltd (2012) 199 FCR 204; [2012] FCAFC 3 at [41]ff per Besanko J (with whom Mansfield and Flick JJ agreed). Accepting for present purposes that Ms Sparkes induced or procured the representations made in the Drawdown Notices, there is no evidence that she knew that the making of those representations involved a breach of contract. Moreover, a director of a company cannot be liable for inducing a breach of contract by the company where the director is merely the individual through whom the company acts: see Pittmore Pty Ltd v Chan [2020] NSWCA 344 at [163]ff per Leeming JA (with whom Bell P and Brereton JA agreed), and cases cited there. There is no reason why the same principle should not apply to employees. On that basis, Ms Sparkes could not be liable for inducing any of the Arrium Entities to breach the terms of the facility agreements. Any acts performed by Ms Sparkes that might otherwise amount to inducement were performed by her either as a director of Finance or AIOH or an employee of Arrium.
5. The case that Ms Sparkes procured a breach of duty on the part of the Arrium Entities must fail for at least four reasons.
6. First, I do not accept that the Arrium Entities owed the Lenders a duty of care in making the representations made by the terms of the facility agreements or that Finance or AIOH (the two Arrium Entities on whose behalf Drawdown Notices were signed) owed the Lenders a duty of care in making the representations contained in the Drawdown and Rollover Notices.
7. It is difficult to see how the Arrium Entities could have owed the Lenders a duty of care in connection with representations and warranties contained in the facility agreements themselves. As the New Zealand Court of Appeal said in Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZLR 324, [2004] NZCA 97 at [66]: Before proceeding further, we note that the claim could not succeed in its present form. To recap, the main duty alleged in this case is a duty to take reasonable care to ensure that the plant was constructed in accordance with contractual specifications contained in a contract to which Carter Holt was not a party. There is no duty in tort to take reasonable care to perform a contract. At most, there is a duty to take reasonable care in or while performing the contract, which is quite a different concept. Carter Holt's pleadings mainly assert the former. A duty formulated in such terms is essentially contractual in nature and therefore cannot be owed to one who is not a party to the contract. (Emphasis added)
8. So far as the representations contained in the Drawdown and Rollover Notices are concerned, it is common ground that in a case such as this, where the Court is considering whether to recognise a duty of care in respect of a relationship which is not within an established category, it is necessary "to undertake a close analysis of the facts bearing on the relationship between the plaintiff and the putative tortfeasor by references to the "salient features" or factors affecting the appropriateness of imputing a legal duty to take reasonable care to avoid harm or injury" (per Allsop P (with whom Simpson J agreed) in Caltex Refineries (Qld) Pty Limited v Stavar (2009) 75 NSWLR 649; [2009] NSWCA 258). Those features include (at [103]): (a) the foreseeability of harm; (b) the nature of the harm alleged; (c) the degree and nature of control able to be exercised by the defendant to avoid harm; (d) the degree of vulnerability of the plaintiff to harm from the defendant's conduct, including the capacity and reasonable expectation of a plaintiff to take steps to protect itself; (e) the degree of reliance by the plaintiff upon the defendant; (f) any assumption of responsibility by the defendant; (g) the proximity or nearness in a physical, temporal or relational sense of the plaintiff to the defendant; (h) the existence or otherwise of a category of relationship between the defendant and the plaintiff or a person closely connected with the plaintiff; (i) the nature of the activity undertaken by the defendant; (j) the nature or the degree of the hazard or danger liable to be caused by the defendant's conduct or the activity or substance controlled by the defendant; (k) knowledge (either actual or constructive) by the defendant that the conduct will cause harm to the plaintiff; (l) any potential indeterminacy of liability; (m) the nature and consequences of any action that can be taken to avoid the harm to the plaintiff; (n) the extent of imposition on the autonomy or freedom of individuals, including the right to pursue one's own interests; (o) the existence of conflicting duties arising from other principles of law or statute; (p) consistency with the terms, scope and purpose of any statute relevant to the existence of a duty; and (q) the desirability of, and in some circumstances, need for conformance and coherence in the structure and fabric of the common law.
9. This list, however, is not a checklist to be applied mechanically and the results tallied to arrive at a conclusion. Rather, it is a list of factors that may be relevant to consider in undertaking the required analysis: Caltex Refineries (Qld) Pty Limited v Stavar (2009) 75 NSWLR 649; [2009] NSWCA 258 at [172] per Basten JA.
10. In the present case, there is no reason to recognise a duty of care owed by Finance or AIOH anymore than there is a reason to recognise a duty of care owed by the individuals who signed the Drawdown Notices. As I have already explained, the Drawdown Notices and their contents were prescribed by the relevant facility agreements, as were the consequences if the representations and warranties made by the Drawdown Notices were false or misleading in a material respect. The terms of the representations and the consequences if the representations and warranties were false or misleading were negotiated between sophisticated parties who were quite capable of protecting their own interests. Consequently, it could not be said that the Lenders were vulnerable to any negligence on the part of Finance or AIOH in making the representations they contained. There is no reason to overlay a quite different set of obligations and consequences on those already set out in the agreements. On the contrary, to do so would be to depart from the principle stated by Crennan, Bell and Keane JJ said in Brookfield Multiplex Ltd v Owners Strata Plan No 61288 (2014) 254 CLR 185; [2014] HCA 36 at [132] that "primacy of the law of contract in the protection afforded by the common law against unintended harm to economic interests where the particular harm consists of disappointed expectations under a contract". The same analysis applies to the representations made by reason of the terms of the facility agreements themselves.
11. The Anchorage Plaintiffs seek to distinguish Brookfield on the facts. In that case, the Owners Corporation of a strata unit development brought claims in negligence against the builder of the development for faulty workmanship. The contract between the builder and developer contained detailed provisions setting out the builder's obligations and limitations on its liability. The contracts between the developer and purchasers of the units also contained provisions concerning the quality of work and the repair of defects. The High Court held that the builder did not, in the circumstances, owe the Owners Corporation a duty of care; and it was in that context that Crennan, Bell and Keane JJ made the remarks that they did. The facts of the present case are very different. Moreover, in the present case, the facility agreements contained an express provision stating that "The rights, Powers and remedies provided to the Lender in the Transaction Documents are in addition to, and do not exclude or limit, any right, power or remedy provided by law".
12. However, neither of these points alters the position. The fact remains that the parties through their agreements set out the rights and obligations arising from the representations contained in the Drawdown Notices. There is no reason to graft a different set of rights on to those agreed by the parties. The term of the facility agreements that preserves other rights cannot be interpreted as creating rights where none would otherwise exist.
13. Second, apart from representations made in respect of the period on and from 11 February 2016, I do not accept that the Arrium Entities breached any duty of care they owed the Lenders, since, on the findings I have made, the MAE Representation was true on each occasion on which it was made at least up until that date.
14. Third, I have already explained why, absent evidence of reliance, I am not satisfied that the Lenders relied on the MAE Representation.
15. Fourth, even if the Arrium Entities did owe the Lenders a duty of care in relation to the MAE Representation and that representation was false, the claim against Ms Sparkes must fail.
16. The general principle is that a director of a company who directs and procures the commission of a tort by the company will be liable for that tort along with the company. As Lord Buckmaster explained in Rainham Chemical Works Ltd (In Liq) v Belvedere Fish Guano Co Ltd [1921] 2 AC 465 at 476, in connection with a Rylands v Fletcher claim against the directors of a company in respect of an explosion on premises that it occupied and that caused damage to a neighbouring property: If the company was really trading independently on its own account, the fact that it was directed by Messrs Feldman and Partridge [the directors] would not render them responsible for its tortious acts unless, indeed, they were acts expressly directed by them. If a company is formed for the express purpose of doing a wrongful act or if, when formed, those in control expressly direct that a wrongful thing be done, the individuals as well as the company are responsible for the consequences …
17. This principle has most often been applied in intellectual property cases. In that context, there has been a question whether liability should attach on the basis that the director "ordered or procured the [infringing] acts to be done" (to quote from the decision of Performing Rights Society Limited v Ciryl Theatrical Syndicate Limited [1924] 1 KB 1 at 14 per Atkin LJ) or on the basis of "deliberate, wilful and knowing pursuit of a course of conduct that was likely to constitute [patent] infringement or reflected an indifference to the risk of it" (to quote from the decision of Mentmore Manufacturing Co Ltd v National Merchandising Manufacturing Co Inc (1978) 89 DLR (3d) 195 at 204 per Le Dain J). Commenting on the two tests, the Full Federal Court in JR Consulting & Drafting Pty Ltd v Cummings (2016) 329 ALR 625; [2016] FCAFC 20 at [350] said this: We suspect that there is ultimately not a great deal of difference between these lines of authority as the director must be shown to have directed or procured the tort and the conduct must, clearly enough, go beyond causing the company to take a commercial or business course of action or directing the company's decision-making where both steps are the good faith and reasonable expression of the discharge of the duties and obligations of the director, as a director. The additional component required is a "close personal involvement" in the infringing conduct of the company and inevitably the quality or degree of that closeness will require careful examination on a case by case basis. That examination might show engagement by the director of the kind or at the threshold described by Finkelstein J in Root Quality at [146] [which involved the director deliberately taking steps "to procure the commission of an act which the director knows is unlawful and procures that act for the purpose of causing injury to a third party"] (as earlier discussed) which would undoubtedly establish personal liability in the director or a less stringent degree of closeness (perhaps described as "reckless indifference" to the company's unlawful civil wrong causing harm), yet sufficiently close to demonstrate conduct of the director going beyond simply guiding or directing a commercial course and engaging in (perhaps vigorously) decision-making within the company as a director.
18. Although these principles have been applied outside the area of intellectual property, as Rainham Chemical Works itself demonstrates, the Anchorage Plaintiffs were not able to point to any case where the principles had been applied to the tort of negligence. They did refer to the decision of Barker J in Australian Executor Trustees Limited v Propell National Valuers (WA) Pty Ltd [2011] FCA 522, a case brought against a company that provided a valuation of real property and the individual director who prepared the valuation report. The report was prepared in connection with a loan advanced by the plaintiff on security of the property. When the mortgagor defaulted, the plaintiff sued the valuer and director on the basis that the valuation was misleading and deceptive. An alternative claim was brought for negligent misstatement. Commenting on the vexed question of when a director of a company will be held liable for the company's conduct, Barker J referred to the principles established in cases such as Rainham Chemical Works (at [180]). However, his Honour did not purport to apply them. Rather, relevantly he found that the director personally owed the plaintiff a duty of care (at [189]).
19. Relying on the decision of Slade LJ (with whom O'Connor and Cumming-Bruce LJJ agreed) in C Evans & Sons Ltd v Spritebrand Ltd [1985] 1 WLR 317, the Anchorage Plaintiffs submit that it is not necessary to prove, or at least it remains an open question whether it is necessary to prove, that the director knew that the conduct was tortious. That case involved an application to strike out a pleading alleging that a director directed or procured a copyright infringement by the company of which he was a director on the basis of a failure to plead knowledge that the conduct was tortious or reckless indifference to that matter. In refusing to strike out the pleading, Slade LJ said (at 329): … I would accept that if the plaintiff has to prove a particular state of mind or knowledge on the part of the defendant as a necessary element of the particular tort alleged, the state of mind or knowledge of the director who authorised or directed it must be relevant if it is sought to impose personal liability on the director merely on account of such authorisation or procurement; the personal liability of the director in such circumstances cannot be more extensive than that of the individual who personally did the tortious act. If, however, the tort alleged is not one in respect of which it is incumbent on the plaintiff to prove a particular state of mind or knowledge (eg, infringement of copyright) different considerations may well apply.
20. Three points may be made about this decision. First, it was a strikeout application. The Court of Appeal did not decide that knowledge or reckless indifference was not a necessary element of the claim in all cases - a point specifically made by Slade LJ in the paragraph following the quoted one. The court simply decided that "different considerations may well apply" in certain cases. Second, it is far from clear why different principles should apply in this area of the law from those that apply to the tort of inducing a breach of contract, which requires knowledge on the part of the tortfeasor of the breach. In any event, the decision in C Evans & Sons appears to be inconsistent with the test most recently stated by the Full Federal Court in JR Consulting & Drafting. I should follow that test stated by the Full Court. Third, the point made by Slade LJ that, if the tort has a mental element then it is necessary to prove that the director also had that mental element, illustrates the difficulty of applying the principle to the law of negligence. Negligence is an essential element of the claim against the company, but how does that translate to a claim against the director? It makes little sense to say that the director is liable if the director was sufficiently closely involved in the relevant conduct and negligently failed to appreciate that that conduct was negligent.
21. A similar problem arises if at a minimum what is required is reckless indifference to the company's unlawful civil wrong. In the present context, what does it mean to say that Ms Sparkes was recklessly indifferent to the alleged negligent misstatements made by Finance and AIOH in the Drawdown Notices? The Anchorage Plaintiffs do not and cannot give a satisfactory answer to that question.
22. The final basis on which it is said Ms Sparkes has accessorial liability is that she was knowingly concerned in the Arrium Entities' breaches of statutory provisions which prohibit a person from engaging in misleading and deceptive conduct.
23. Section 79 of the Corporations Act relevantly states that "A person is involved in a contravention if … the person … has been in any way, by act or omission, directly, or indirectly, knowingly concerned in, or party to, the contravention". Section 1041I states that a person "who suffers loss or damage by conduct of another person that was engaged in a contravention of section … 1041H may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention …". Sections 2 and 236 of the ACL contain analogous provisions. Section 5(3) of the ASIC Act incorporates Parts 1.2 of the Corporations Act, which includes s 79. Section 12GF of the ASIC Act mirrors s 1041I of the Corporations Act, with the result that it too permits a person to recover damages from a person knowingly concerned in a contravention of s 12DA.
24. In order for a person to be "knowingly concerned" in a contravention the person must have knowledge of the essential facts constituting the contravention. "Knowledge" in this context means actual knowledge, not imputed or constructive knowledge, although wilful blindness to the falsity of a representation is sufficient: Australian Competition and Consumer Commission v IMB Group Pty Ltd [2003] FCAFC 17 at [135]; Australian Securities and Investments Commission v Rent 2 Own Cars Australia Pty Ltd [2020] FCA 1312 at [372]ff. It is not necessary for the person to know that those facts constitute a contravention: Yorke v Lucas (1985) 158 CLR 661; [1985] HCA 65 at 670 per Mason ACJ, Wilson, Deane and Dawson JJ; Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53; [2003] HCA 75 at [48].
25. For the reasons I have given, with the possible exception of representations made in respect of rollovers that occurred on 11 or 12 February 2016, the MAE Representation was not misleading at any time at which it was made. For that reason, the knowingly concerned claim against Ms Sparkes must fail except possibly in relation to the rollovers that occurred on those dates. However, in my opinion it must fail in any event because CBA and DB have not established that Ms Sparkes knew each of the essential elements of the contravention. In particular, they have not established that Ms Sparkes knew that the MAE Representation was false.
26. The Anchorage Plaintiffs submit that it can be inferred that Ms Sparkes knew that the representation was false because she was aware that Arrium's financial position had changed and that that change reduced its ability to perform its obligations. I accept that Ms Sparkes knew that there had been a change in Arrium's financial position. However, I do not accept that she appreciated that that change had had a Material Adverse Effect, assuming that there was one. The Anchorage Plaintiffs do not identify the changes they rely on in this context. Nor do they identify the evidence which establishes that Ms Sparkes was aware that those changes had the relevant effect. A broad and unsubstantiated assertion that those matters are made out is not a substitute for an identification of the material that supports the assertion.
27. Moreover, the question whether the MAE Representation was true or not involved the formation of an opinion based on an analysis of a substantial amount of financial information. It is unclear which of that financial information was known to Ms Sparkes. It certainly cannot be inferred from the information that was available that Ms Sparkes must have formed the requisite opinion, particularly when, as I have explained, there was a reasonable basis for reaching the opposite conclusion.
28. A further difficulty with the Anchorage Plaintiffs' accessorial claims against Ms Sparkes is that, for the reasons I have already explained, I am not satisfied that the Anchorage Plaintiffs have established that the Par Lenders relied on the representations contained in the Drawdown and Rollover Notices. Consequently, to the extent that the claims against the Arrium Entities depend on proof of loss flowing from the relevant breach (as the negligence and statutory claims do), those claims must fail for that reason as well, with the result that the accessorial claims must also fail.
29. For those reasons, the accessorial claims against Ms Sparkes must fail.

Introduction

1. In all, three types of claim are made against Mr Bakewell.
2. First, it is alleged that Mr Bakewell owed the Par Lenders a duty of care (1) in giving and reaffirming the "Bakewell Direction" - that is, the direction allegedly given to Ms Sparkes in December 2015 to drawdown all available funds under the facility agreements; (2) to ensure that the MAE Representation was true and accurate. It is alleged that he breached both duties.
3. Second, it is alleged that Mr Bakewell directed and procured negligent misstatements and breaches of the facility agreements by the Arrium Entities. Like the analogous claim made against Ms Sparkes, these claims essentially concern the MAE Representation said to have been made both by the terms of the relevant facility agreements and the terms of the Drawdown and Rollover Notices.
4. Third, it is alleged that Mr Bakewell was involved in a contravention by the Arrium Entities of the statutory provisions relating to misleading and deceptive conduct. Again, this claim mirrors the claims against Ms Sparkes. Like the claim against Ms Sparkes, the claim is limited to claims pursued by CBA and DB as Par Lenders.

The claim in respect of the Bakewell Direction

1. Mr Bakewell accepts that he gave the Bakewell Direction to Ms Sparkes no later than 17 December 2015, following a conversation he had with Mr Nestel, although according to Mr Bakewell the instruction was qualified. It was left to Ms Sparkes to decide whether the instruction could be followed consistently with Arrium's obligations under the facility agreements. There is some evidence (in the form of Mr Robert's handwritten note made at the board meeting on 2 December 2015) that the idea to draw down all remaining facilities was first raised by Mr Edwards at that meeting. There is no evidence to suggest that the board resolved to accept Mr Edwards' advice. It is unclear whether Ms Sparkes acted on the instruction. As I have explained, it is not easy to reconcile Mr Bakewell's evidence that he gave the Bakewell Direction with the evidence that he says prompted it - which was his conversation with Mr Nestel. The objective evidence suggests that Mr Nestel's advice was confined to advice that Arrium should not repay debt and did not extend to advice that Arrium should draw down all remaining debt immediately. Having said that, the effect of Mr Bakewell's evidence is clear. Mr Nestel did not give evidence. It appears that the idea of drawing down all remaining debt was raised, albeit by Mr Edwards. Taking these matters into account, I accept that Mr Bakewell first gave the Bakewell Direction no later than 17 December 2015.
2. However, it seems clear that the instruction was not acted on immediately; and the likelihood is that it was expressed as an idea worthy of serious consideration rather than a direction that Mr Bakewell expected to be implemented immediately. As is apparent from the attached annexures, Arrium drew down on the facilities over the period from late December 2015 to about mid-February 2016. The Anchorage Plaintiffs submit that the drawdowns that occurred in late December 2015 and January 2016 were, in effect, part of a carefully orchestrated plan to put Mr Bakewell's direction into effect without alerting the Lenders to what was happening. That submission does not sit easily with the plaintiffs' submission that Arrium was facing a liquidity crisis, and it is not supported by the objective evidence. Debt did reduce at the end of December 2015, which was consistent with Arrium's usual end of accounting period practice. That reduction occurred in accordance with irrevocable repayment notices, all of which were given on or before 18 December 2015. The liquidity forecast prepared on 11 December 2015 and tabled at the 18 December 2015 board meeting shows a spike in drawn debt after 31 December 2015, as might be expected, but it does not show all debt being drawn at any time covered by the period of the forecast, but again it is likely that that forecast was prepared before the direction was given. However, the same is true of the forecast prepared for the board meeting on 7 January 2016. In fact, that forecast indicates that some debt would be repaid in March 2016. It is not until the board meeting on 19 January 2016 that the forecast suggests that drawn debt would approach the facility limits, and then only in March 2016.
3. The likelihood is that Mr Bakewell repeated the Bakewell Direction to Ms Pearce on or about 8 February 2016. That is Ms Pearce's recollection, which is consistent with her handwritten file note. Mr Bakewell does not deny that he gave the instruction; and it is consistent with what Arrium subsequently did. Mr Bakewell accepts that that is not a decision Ms Pearce would have made. The likelihood is that it was something that she was instructed to do, and the likelihood is that those instructions came from Mr Bakewell following the board meeting on 4 February 2016 at which it appears the topic was discussed. Following the instruction on 8 February 2016, Arrium served notices to drawdown USD16 million under the CBA Facility Agreement on 9 February 2016, CAD9.9 million under the Westpac Facility Agreement on the same day and USD20 million under the BBVA Facility Agreement on 10 February 2016. As I have explained, HSBC refused to honour the Drawdown Notice served on it on 11 February 2016.
4. Absent a more detailed analysis of Arrium's liquidity needs in January 2016, I am not satisfied that the drawdowns made prior to 8 February 2016 were made as a consequence of the Bakewell Direction. However, particularly given their timing, the likelihood is that the drawdowns made after 8 February 2016 were made in accordance with the Bakewell Direction.
5. In my opinion, the case based on the Bakewell Direction is misconceived. Again, for reasons which are unclear, the Anchorage Plaintiffs formulate their case both in terms of negligence and negligent misstatement, as if they were distinct torts. The real question is whether Mr Bakewell owed the Lenders a duty of care in giving the instruction he did. In my opinion, he did not. The instructions were internal instructions given as part of the internal operations of Arrium. It appears that they were given by Mr Bakewell following a board meeting during which a suggestion was made that Arrium drawdown on its remaining facilities and that suggestion was accepted, at least tacitly, by the board or perhaps Mr Roberts.
6. It cannot possibly be the case that every time a director or employee of a company makes and communicates a decision to another employee which affects a third party, the employee making and communicating the decision owes the third party a duty to take reasonable care to avoid causing that third party economic loss arising from that instruction, even if that loss is reasonably foreseeable. That, however, is the logical consequence of a finding of a duty of care in this case. Such a conclusion would involve a radical change in the law and is inconsistent with established and binding authority: see, for example, Spies v The Queen (2000) 201 CLR 603; [2000] HCA 43 at [95] per Gaudron, McHugh, Gummow and Hayne JJ. The directors of a company do owe a duty to consider the interests of creditors where the company is approaching insolvency. But that duty is still one owed to the company and not to the creditors: Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722. It would be perverse if the directors did not owe a direct duty to creditors where the company was at risk of becoming insolvent, but employees owed a duty to creditors to take reasonable care to avoid economic loss arising from actions they took that were internal to the operations of the company.
7. For reasons already given, there is nothing about the facts of this case which would justify the imposition of a duty of care in accordance with established principle. The parties had agreed a process by which drawdowns and rollovers were to occur. As part of that process, both Arrium in the facility agreements and the borrowing entity in the relevant notice gave representations and warranties relevant to the Arrium Entities' financial position. It was open to the Lenders to negotiate for other representations and warranties or for different consequences if those they had negotiated were breached. They were, therefore, not vulnerable to a want of care on Mr Bakewell's part. Moreover, the imposition of a duty of care on Mr Bakewell would place him in an impossible position. In the present case, it appears that by giving the direction he was acting in accordance with the wishes of the board or Mr Roberts and on advice apparently given by Mr Edwards of Lazard. It might reasonably be thought that his duties to Arrium required him to give the instruction in those circumstances.
8. The Anchorage Plaintiffs do not give any convincing explanation of why it would be appropriate to hold Mr Bakewell liable for the consequences of the directions he gave. Accepting that the directions were a necessary condition for the harm allegedly suffered by the Lenders, it is not clear why the scope of Mr Bakewell's liability should extend to the harm arising from the fact that the Lenders advanced the funds that they did. Those funds were advanced in response to Drawdown Notices served on the Lenders in accordance with the facility agreements. In accordance with those agreements, the Arrium Entities made certain representations. It was in reliance on those notices that the Lenders advanced the funds. I have already explained why, in my opinion, the Anchorage Plaintiffs have failed to prove that the Lenders relied on the representations made in or as a result of the Drawdown Notices. In those circumstances, it is difficult to see why the scope of Mr Bakewell's liability should extend to the consequences flowing from the fact that the Lenders advanced funds in accordance with the notices.

The claims based on accessorial liability

1. It is not necessary to discuss these claims in any detail. Generally, they must fail for the same reasons as similar claims against Ms Sparkes.
2. For the reasons I have explained, the Arrium Entities did not breach the terms of the facility agreements by making the representations they did. I am not satisfied that the representations - most importantly, the MAE Representation - were false or misleading (with the possible exception of the representations that were made in respect of rollovers that occurred on 11 and 12 February 2016). Even if they were, that would not amount to a breach of the facility agreements absent notice, which was not given.
3. Apart from the Bakewell Direction, there is no evidence that Mr Bakewell induced or procured the Drawdown and Rollover Notices by which, or as a consequence of which, the representations were made. The Drawdown and Rollover Notices were issued as part of the normal functions of Arrium's Treasury group. In any event, there is no evidence that Mr Bakewell knew that the representations amounted to a breach of the facility agreements, assuming that they did.
4. I have already explained why I do not think the Arrium Entities owed the Lenders a duty of care in making the representations they did, why the representations were not made negligently and why I have concluded that the Lenders did not rely on the representations. Similarly, I have explained why accessorial liability based on directing and procuring a tort is not available in respect of a negligence claim. The same analysis applies equally to the claim against Mr Bakewell.
5. That leaves the knowingly concerned claim brought by CBA and DB to the extent that they are Par Lenders. I have already explained why the claim against the Arrium Entities for misleading and deceptive conduct must fail at least in respect of drawdowns and rollovers that occurred before 11 February 2016. The question remains whether, if that conclusion is wrong, Mr Bakewell was knowingly concerned in that misleading conduct - that is, whether Mr Bakewell was sufficiently involved in the issuing of the notices that it could be said that he was concerned in the representations made in or by reason of them and whether he knew that they were false, assuming that they were.
6. It is, of course, difficult to answer this question definitively in a context in which I have concluded that, with the possible exception of the Rollover Notices in respect of debts rollover on 11 and 12 February 2016, the Drawdown and Rollover Notices were not misleading and deceptive because the MAE Representation was not false at the time the notices were issued. However, two general points can be made.
7. First, in order for a person to be "concerned" in a contravention there must be a practical connection between the person and the contravention: see Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq) (2015) 235 FCR 181; [2015] FCA 432 at [407]ff and cases cited there. Just what practical connection is sufficient will depend on all the circumstances of the case.
8. In the present case, it is not suggested that Mr Bakewell had any particular involvement in the decision to serve the relevant Drawdown and Rollover Notices. It is not suggested, for example, that he was in some way involved in the selection of which facilities should be drawn on at which times. In their written submissions, the Anchorage Plaintiffs identify five matters that are said to demonstrate that Mr Bakewell was an intentional participant in the Arrium Entities' misleading conduct. They are: 1. He was in a position of responsibility as CFO of Arrium and a director of Finance and AIOH; 2. He was aware that the Drawdown Notices contained the relevant representations; 3. He accepts that he bore ultimate responsibility for the drawing down of funds under the Drawdown Notices and ensuring that the relevant representations were accurate; 4. He directed or otherwise authorised the drawing down of funds pursuant to the notices; 5. He was aware of the change in Arrium's financial position and that that change reduced its ability to perform its obligations.
9. The matters referred to in (b) and (e) can be put to one side for the moment, since they go to Mr Bakewell's knowledge, not his conduct. Paragraph (d) states a generalised conclusion. It does not identify facts which justify a conclusion that Mr Bakewell was sufficiently involved in the conduct. Accordingly, the Anchorage Plaintiffs' case boils down to the claim that Mr Bakewell was involved in the contravention because as CFO (and a director of Finance and AIOH) he bore ultimate responsibility for the drawing down of funds and the contents of the notices. It is not clear what "ultimate responsibility" means in this context. To say that he bore ultimate responsibility to the Lenders states the conclusion, not a reason for it. And it is not correct to say that he bore ultimate responsibility for the drawing down of funds or for ensuring that the relevant representations were accurate. That responsibility was borne by the board. The case seems to be that Mr Bakewell was involved in the contravention because he was the executive with overall responsibility for managing the financial aspects of Arrium's business under the supervision of the CEO and the board. In my opinion, that is not enough. Rather, Mr Bakewell must personally have taken some action or failed to take some action expected of him in relation to the particular Drawdown Notices and the statements they contained so that it could be said that he had a practical involvement in the making of the statements in the particular notices in question. The Anchorage Plaintiffs have not established that he did. It may be that the Bakewell Direction would have been sufficient to establish Mr Bakewell's personal involvement. However, on the findings I have made, that direction was not acted on before 8 February 2016, by which time all the Drawdown Notices relevant to the Anchorage Plaintiffs, apart from the one dated 9 February 2016 given under CBA Facility Agreement, had been issued.
10. As to the question of knowledge, it was necessary for Mr Bakewell to know that the representations contained in the Drawdown Notices were false. If the representations were false, then plainly Mr Bakewell knew the facts from which the conclusion of falsity could be drawn. But that would not be sufficient. It would be necessary for the Anchorage Plaintiffs to establish that Mr Bakewell actually drew that conclusion or was wilfully blind to the fact that the conclusion followed from what he knew. As I have explained, the question whether there was a change in financial position that had a Material Adverse Effect involved the formation of an opinion based on a large number of facts. Even if the correct position is that there was a breach of MAE Representation, it is not so obvious that that is an opinion that Mr Bakewell ought to have formed, so that it could be said that he was wilfully blind to the fact.

The validity of the assignments

1. It is not necessary in this judgment to set out in any detail the mechanism by which the relevant Par Lenders, and a number of intermediary Assignees, sought to assign the rights of action the Anchorage Plaintiffs assert in the Anchorage Proceeding against the defendants. As I have said, it is common ground that the assignments were not effective to assign any of the statutory causes of action, since it is accepted that the relevant statutes do not permit an assignee to recover damages for a contravention of those provisions. It is also common ground that the assignments by their terms are sufficiently broad to assign the common law causes of action on which the Anchorage Plaintiffs sue. The only question is whether those assignments are ineffective because they infringe the principle that bare causes of action are not assignable since they "savoured of or was likely to lead to maintenance": Glegg v Bromley [1912] 3 KB 474 at 489 per Parker J.
2. The question whether the assignments were ineffective to assign the relevant causes of action was addressed by me in an interlocutory judgment dealing with a contested application by the Anchorage Plaintiffs to amend to bring the assigned claims (see Anchorage Capital Master Offshore Pty Ltd v Sparkes [2019] NSWSC 384) and by the Court of Appeal in an application for leave to appeal from that judgment (see Bakewell v Anchorage Capital Master Offshore Ltd (2019) 372 ALR 349; [2019] NSWCA 199). It is not necessary to repeat what was said in my earlier judgment. It is sufficient to observe that I allowed the amendments by which the present claims are brought because (1) a recognised exception to the general principle prohibiting the assignment of a bare cause of action is where the assigned claims are ancillary to a proprietary right or interest which itself is assigned; (2) on the state of the current authorities, it was at least arguable that the causes of action on which the Anchorage Plaintiffs sue were ancillary to the debts assigned to them because "ancillary" in this context included cases where there was a legitimate commercial purpose in taking an assignment of the causes of action together with the debt.
3. Bell P (with whom Macfarlan and White JJA agreed) gave three reasons for refusing leave to appeal. One was that "it is at the very least arguable within the scope of existing authority that the assignments were valid" (at [49]). Another (at [50]) was the following: [I]n light of the abolition of the tort and offence of maintenance and champerty in recent decades, what the plurality in Equuscorp [Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498; [2012] HCA 7] described at [50] as "[t]he attenuated role of maintenance and champerty" and decisions such as Campbells Cash & Carry [Campbells Cash & Carry Pty Ltd v Fostif Pty Limited (2006) 229 CLR 386; [2006] HCA 41] at [66]-[82], the public policy underpinnings of the prohibition against the assignment of bare causes of action cannot be regarded as secure or at least not so secure as to justify summary dismissal on the basis of existing authority.
4. I have already concluded that the relevant causes of action do not exist, with the result that the question of assignment does not arise. If I am wrong in that, then it may be relevant to know on which causes of action the Par Lenders are entitled to succeed before determining the validity of an assignment of those claims. It is arguable, for example, that there is a difference between causes of action which depend on accessorial liability for breaches of obligation arising from the facility agreements and direct claims in negligence against the defendants themselves. Consequently, it seems better that the question of the validity of the assignments be dealt with on the basis of actual findings concerning the causes of action that exist rather than on the basis of one or more of a number of hypotheses. Having said that, had it been necessary to do so, I would have concluded that the assignments of the causes of action based on representations made in, or by reason of, the Drawdown Notices were valid.
5. As I explained in my earlier judgment, prior to the decision of the House of Lords in Trendtex Trading Corporation v Credit Suisse [1982] AC 679, the law recognised two exceptions to the general principle that bare causes of action were not assignable, although there is not necessarily a clear dividing line between the two. One was where the assignment was of a property right or interest and the cause of action was ancillary to that right. The other was where the assignee had a genuine commercial interest in taking the assignment. In Trendtex, the House of Lords held, in what was generally seen at the time to be an extension of the existing law, that the second exception was wide enough to cover a case where the assignee had a financial interest in the outcome of the assigned claim because its ability to recover a debt owed to it by the assignor depended on the success of that claim. The correctness of Trendtex was accepted by the High Court in Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498; [2012] HCA 7. In that case, the Court determined that a restitutionary claim had been validly assigned in conjunction with the assignment of a contractual debt. French CJ, Crennan and Kiefel JJ explained their decision in these terms at [53]: A restitutionary claim for money had and received under an unenforceable loan agreement is inescapably linked to the performance of that agreement. If assigned along with contractual rights, albeit their existence is contestable, it is not assigned as a bare cause of action. Neither policy nor logic stands against its assignability in such a case. The assignment of the purported contractual rights for value indicates a legitimate commercial interest on the part of the assignee in acquiring the restitutionary rights should the contract be found to be unenforceable. Equuscorp fell into the category of a party with a genuine commercial interest in the restitutionary rights.
6. Two comments may be made about this passage. First, in my opinion, their Honours are to be understood as saying that a proprietary right and other rights assigned with it will be sufficiently connected to support the assignment of the latter if it can be said that the assignee has a genuine commercial interest in taking an assignment of the latter with the former. Second, the decision is a recognition that there has been a change in public policy away from the view that "trafficking" in litigation was a social evil towards a recognition that the assignment of legal rights performs a useful social function in ensuring that losses are properly borne by those legally responsible for them.
7. In the present case, consistently with the decision in Equuscorp, it seems clear that the claims in negligence against the Arrium Entities in relation to the Drawdown Notices (if they existed) were assignable with the assigned debts, since they would have been available as an alternative to a claim based on the facility agreements themselves. It seems a small step to say that the Assignees had a legitimate commercial interest in also taking an assignment of accessorial claims in relation to breaches of the facility agreements and the representations made in the Drawdown Notices, since those claims were intimately connected to the claims against the Arrium Entities themselves and were a means of protecting the Assignees in the event that the claims against the Arrium Entities were not recoverable. It also seems a small step to say that the Assignees had a legitimate commercial interest in taking an assignment of direct claims against the defendants arising out of the same facts for the same reasons. If the defendants were liable to the Par Lenders as a result of their conduct in connection with the facility agreements, there appears to be no policy reason why they should not also be liable to the Assignees.
8. The defendants submit that the assignments are against public policy because properly understood, they should be seen as trafficking in litigation with a view to profit. In support of that proposition, they point to analyses undertaken by at least some of the Assignees which indicate that, in assessing the price they were willing to pay for the assigned debts, they placed value on recovery under the defendants' Directors and Officers Liability insurance. But that does not establish that they were trafficking in litigation with a view to profit. The Assignees acquired debts with a certain face value at a discounted price reflecting the costs and uncertainties associated with the recovery of those debts. If the price they paid for the debts was less than the amount they ultimately recovered, they would make a profit. But that does not establish that they acquired a bare right to sue with the intention of making a profit. They acquired debts of a certain value. The right to sue was ancillary to the acquisition of those debts and was one of the means by which the Assignees could seek to recover the face value of the debts that they acquired. There was no possibility of recovering more. Accepting that the trafficking in bare causes of action with a view to profit is still against public policy, the acquisition of the causes of action arising from the Drawdown Notices does not fall into that category. It may be that the other causes of action relied on by the Anchorage Plaintiffs do. However, in the light of what I have said, it is not necessary to pursue that issue further.

Introduction

1. The claims in the BOC Proceeding are relatively straightforward. As I have explained, the claims are brought in respect of ten Drawdown Notices issued between 7 January 2016 and 10 February 2016. The BOC Plaintiffs rely on the express representations contained in the Drawdown Notices. They also contend that the Drawdown Notices contained an implied representation to the effect that each of the conditions precedent set out in the relevant facility agreements was satisfied. Why that is so and the utility of that claim is unclear. The facility agreements contained certain conditions precedent to the obligation to advance funds, one of which was that each of the representations required to be made under the agreement was "true and correct in all material respects and is neither misleading or deceptive in any material respect as at the date of the relevant Drawdown Notice and at the relevant Drawdown Date". In effect, the BOC Plaintiffs contend that the relevant Arrium Entities, by the Drawdown Notices, represented that that condition had been satisfied, which is equivalent to a representation that the representations it was making were true and correct etc. Such a representation adds nothing to the underlying representations and makes little sense. It was not a case that was explained in final submissions. For those reasons, it can be put to one side.
2. The BOC Plaintiffs claim that the Drawdown Notices were misleading and deceptive for two reasons. One was that they represented that Arrium was solvent when it was not. The other was that they made the MAE Representation, which was false because there had been a change in financial position which had a Material Adverse Effect. They claim that Ms Sparkes engaged in the misleading and deceptive conduct in contravention of s 18 of the ACL because she authorised the issue of the Drawdown Notices up until the date her resignation took effect (on 29 January 2016). They claim that Mr Bakewell engaged in misleading and deceptive conduct in contravention of s 18 of the ACL because he was the person with the relevant authority and knowledge who instructed the February 2016 Drawdown Notices to be issued. Unlike the Anchorage Plaintiffs, the BOC Plaintiffs gave evidence of reliance.
3. I have already explained why I have concluded that the BOC Plaintiffs have failed to prove that Arrium was insolvent at any relevant time and why the plaintiffs have failed to prove that the MAE Representation was false at any relevant time up until 11 February 2016. However, something more needs to be said in relation to the BOC Plaintiffs' claim that Ms Sparkes and Mr Bakewell engaged in misleading and deceptive conduct because they were the persons who authorised the relevant notices and the BOC Plaintiffs' case on reliance.

The case that Ms Sparkes and Mr Bakewell personally engaged in misleading and deceptive conduct

1. In essence, it is the BOC Plaintiffs' case that the Drawdown Notices were misleading for the reasons given, that Ms Sparkes authorised the January 2016 notices and Mr Bakewell authorised the February 2016 notices and that by doing so they themselves engaged in misleading and deceptive conduct.
2. There are two difficulties with the approach taken by the BOC Plaintiffs. First, their analysis starts at the wrong point. They identify representations that are said to be misleading and ask who is responsible for them. However, the correct approach is to identify the conduct engaged in by Ms Sparkes and Mr Bakewell and to ask whether that conduct was misleading or deceptive - that is, whether it had a tendency to lead a person into error. Second, their approach proceeds on the basis that anyone who authorised the Drawdown Notices themselves engaged in misleading and deceptive conduct. But, in my opinion, that is not the correct test.
3. In the present case, the conduct that is said to be misleading is the making of representations which are said to be false. In order for a person to engage in misleading or deceptive conduct by making a false representation, the person must make the representation, since it is the making of the representation that constitutes the misleading or deceptive conduct. It is not possible to set out a definitive test for determining whether a person is the maker of a representation for the purpose of the statutory provisions prohibiting misleading and deceptive conduct. That will depend on all the facts of the case. In the simplest case, the person will be the person who personally or through an agent communicates the false statement to the representee. But that is neither necessary nor sufficient. A person who prepares a document containing misleading statements with the intention or expectation that the document will be provided to other persons may be regarded as the maker of the representations communicated by the document even though that person is not the person who provides the document to those persons. On the other hand, a person who is responsible for providing a document to another person which contains false statements will not engage in misleading or deceptive conduct if properly understood the representation is not his or her representation. That explains why a purely ministerial act by a company employee will not amount to engaging in misleading and deceptive conduct, even where that act consists of the communication of a representation that is misleading.
4. In this context, it is relevant to bear in mind that the legislation draws a distinction between engaging in misleading and deceptive conduct and being involved in conduct that is misleading or deceptive, which includes being knowingly concerned in that conduct. Plainly, the legislation contemplates that a person can be involved in misleading and deceptive conduct in a way that falls short of engaging in that conduct. The concept of engaging in misleading and deceptive conduct must not be interpreted so broadly that it makes the accessorial liability provisions otiose.
5. On the approach taken by the BOC Plaintiffs, the task is to find the person responsible for the misleading conduct. As they put it in their closing written submissions "The question is "who is the real culprit for the conduct?". One consequence of that approach, which they accept if not embrace, is that where a representation is made by a corporation that is misleading or deceptive, it will always be possible to identify at least one individual who also engaged in misleading and deceptive conduct. It will be the individual or individuals within the corporation who authorised the representation to be made. In my opinion, that proposition is not supported by the authorities relied on by the BOC Plaintiffs and would involve a radical change in the law. For one thing, it places all the focus on the representor and none on the representee and what the representee would reasonably understand from the conduct, despite the fact that the question whether conduct is misleading or deceptive is to be determined by asking the question whether it has a tendency to lead the representee into error.
6. The case which perhaps comes closest to supporting the BOC Plaintiffs' submission, and one on which they place considerable reliance, is Australian Securities and Investments Commission v Narain (2008) 169 FCR 211; [2008] FCAFC 120. In that case, Citrofresh International Ltd, a publicly listed company which was in the business of supplying disinfectant products using an active ingredient known as "Citrofresh", sent an announcement to the ASX stating that in a "landmark" test result, Citrofresh had demonstrated significant virucidal activity against four major viruses including HIV/AIDS. The announcement included a statement that the company believed it could now offer "a global solution" to reduce and stop the spread of HIV using Citrofresh. The text of the announcement was approved by Mr Narain, who was the company's CEO. Mr Narain also participated in the preparation and drafting of the announcement and directed the company's secretary, Mr Hanlon, to send it to the ASX.
7. ASIC brought proceedings against Mr Narain for a contravention of s 1041H(1) of the Corporations Act, which provides that "a person must not … engage in conduct, in relation to a financial product … that is misleading or deceptive or is likely to mislead or deceive". The trial judge relevantly found that Mr Narain had not himself engaged in misleading and deceptive conduct. That was because he was not personally engaged in sending the announcement to the ASX. That conduct was engaged in by the company and the person who transmitted the announcement to the ASX.
8. The Full Court allowed the appeal and remitted the case for rehearing, principally on the question whether Mr Narain had breached his duties as a director by authorising the publication. It also remitted for rehearing the question whether the contents of the announcement were misleading, although it is apparent that the Full Court considered it was. In rejecting the trial judge's conclusion that Mr Narain had not personally engaged in misleading and deceptive conduct because he did not send the announcement to the ASX, Finkelstein J, in words that are reflected in the submissions of the BOC Plaintiffs, said (at [19]): As the judge pointed out, Mr Narain did not publish the Release. Speaking strictly, the Release was published by the ASX. Nor did Mr Narain send the notice to the ASX. But the publication of the Release by the ASX was the natural consequence of giving the Release to the ASX and its publication should, in the first instance, be attributed at least to the person who sent it to the ASX. As the judge pointed out, that person is CTF or the company secretary, or both of them. The real culprit, however, is not the individual who sent the Release to the ASX; in many cases that person might just be an office worker. It is the person in authority who, with knowledge of its contents, gave the instruction that the Release be sent to the ASX for publication. In my opinion the action of the company secretary must be treated as the action of Mr Narain. It is his action either because the company secretary was his agent, or, as I would prefer, because, in the circumstances of a case such as this, the secretary's actions should, as a matter of law, be attributed to Mr Narain.
9. Jacobson and Gordon JJ gave a number of reasons for reaching the same conclusion: [94] First, the High Court has followed the House of Lords in holding that in the world of tort law the status of a person as an employee or director of a company does not divest him or her of personal liability for wrongful acts committed in that capacity; the same applies under s 52 of the Trade Practices Act and other statutory analogues …. … [96] Second, the question in each case is whether all of the elements of the contravention are made out against the individual or whether he or she merely acted as a corporate organ, binding the company but not the person individually: Cleary v Australian Co-Operative Foods Ltd (Nos 2 & 3) (1999) 32 ACSR 701 at [54], [56] and [57]; Pico Holdings Inc v Voss [2004] VSC 263 at [157]; Genocanna Nominees Pty Ltd v Thirsty Point Pty Ltd [2006] FCA 1268 at [297]-[305]. [97] Third, as the authorities referred to in the previous paragraph make clear, it is a question of fact in each case whether all the elements of the contravention are made out …. [98] In the present case, as in Cleary, Mr Narain was personally liable for the contravention by having authorised Mr Hanlon [the company secretary] to send the announcement to the ASX. Mr Hanlon's actions were ministerial, as an organ of the Company or an agent of Mr Narain, and quite independent of any liability on his own behalf.
10. The facts of Narain were very different to the facts of the present case. There the representations were contained in a document that Mr Narain was involved in preparing. By instructing Mr Hanlon to send the document to the ASX, Mr Narain must have intended the representation to be made to members of the public. It is likely that members of the public who read the announcement would have understood that it had the approval of senior management if not the board of Citrofresh International.
11. Narain does not stand for some general proposition that in every case the person within a company who authorises the company to make a representation is to be treated as a person making the representation. In Narain, the focus was on the question whether it could be said that Mr Narain made the representations in question even though he did not himself release the announcement containing those representations. Not surprisingly, the Full Court held that it could. But as Jacobson and Gordon JJ stressed, each case must be decided on its own facts.
12. As I have explained, in the present case, the representations were contained in a pro forma document that was required to be issued by Arrium in order to drawdown on its facilities. The terms of the representations were determined by agreements negotiated between Arrium and its Lenders. It was not the task or responsibility of Ms Sparkes or Mr Bakewell to determine the contents of the representations made in the Drawdown Notices, nor did they. The form of the notices indicate that they were given by the Arrium Entity seeking to draw on the funds. The facility agreements required the notices to be signed by an Authorised Signatory. The purpose of that requirement was to provide a contractual mechanism by which the relevant Arrium Entity became bound by the Drawdown Notices, including the representations that they contained. It was not relevant for the Lenders to know the internal mechanism by which a decision was made to make a particular drawdown. Despite the ability of Arrium and the Lenders (who were the only persons who might rely on the notices) to reach an agreement on who else was to be taken to have made the representations contained in the Drawdown Notices, no such agreement was reached.
13. The BOC Plaintiffs submit that a person responsible for generating a pro forma document will be liable for its misleading representations. They rely on the decision in Robinson v 470 St Kilda Road Pty Ltd (2018) 263 FCR 572; [2018] FCAFC 84 in support of that proposition. However, in that case the misleading representation was contained in a statutory declaration provided by a company's chief operating officer in relation to a payment claim served in accordance with the Building and Construction Industry Security of Payment Act 2002 (Vic). That case is plainly distinguishable from the present one.
14. The BOC Plaintiffs also place emphasis on the fact that it was the responsibility of Ms Sparkes and Mr Bakewell to ensure that when the company drew down on any of its facilities that the representations and warranties that the company was giving under those agreements were true (to paraphrase a question asked of Mr Bakewell during the public examinations conducted by the liquidator to which Mr Bakewell gave an affirmative answer). Two points may be made about that. First, the fact that Mr Bakewell or Ms Sparkes had some internal responsibility for ensuring that the representations were true, does not mean that they made the representations. Second, to say that Mr Bakewell and Ms Sparkes were responsible for ensuring the representations and warranties were true is an over-simplification. The terms of the facility agreements were approved by the board. Ultimately, it was a board responsibility to determine whether Arrium remained solvent. The board understood that and during the period from at least January 2016 regularly passed resolutions concerning Arrium's solvency that recognised that fact. Similarly, it was ultimately a board responsibility to determine whether Arrium could continue to drawdown on the facilities that it had approved. No doubt, if either Mr Bakewell or Ms Sparkes became aware of facts, or formed an opinion, that suggested that Arrium could no longer drawdown on its facilities, it was incumbent on them to bring that to the board's attention (or at least to Mr Bakewell's attention, in the case of Ms Sparkes). The board was at least as well informed as Mr Bakewell about the issues relevant to the question whether the representations were true and better informed than Ms Sparkes. The evidence does not establish that either Mr Bakewell or Ms Sparkes formed the opinion the Arrium Entities could not make the representations in the Drawdown Notices. More significantly, though, these considerations reinforce the conclusion that it was the Arrium Entities making the representations, not Mr Bakewell or Ms Sparkes.
15. For those reasons, I am not satisfied that either Mr Bakewell or Ms Sparkes engaged in misleading and deceptive conduct, even if the representations made in the Drawdown Notices were false.

Causation

1. Before addressing the BOC Plaintiffs' case on causation, it is necessary to say something about the BOC Plaintiffs' evidence of reliance.
2. As is apparent from Annexure 2 (61530, pdf) to this judgment, the relevant Drawdown Notices were given under the three syndicated facility agreements, the Westpac Facility Agreement and the BBVA Facility Agreement. BOC was only a party to the 2013 SFA. BBVA was a party to the 2013 SFA and the 2014 SFA. Westpac was a party to all three syndicated facility agreements.
3. Drawdown Notices under the syndicated facility agreements were sent to NAB as agent. The person at NAB responsible for dealing with the Drawdown Notices was Ms Cathy Liu. Ms Liu did not give evidence. However, her supervisor, Ms Allison Dinham, did. According to Ms Dinham, it was Ms Liu's responsibility to check that the notice was in order and to enter the details of the notice into LoanIQ, a software platform used by NAB to service syndicated loan facilities, among other things. LoanIQ then automatically generated a "Drawdown Intent Notice" or a "Repricing Intent Notice" that was emailed to the relevant Lenders and the Arrium Treasury group via LoanIQ. At the same time, it was Ms Liu's responsibility to upload a copy of the Drawdown Notice to Debtdomain, a global, internet based syndicated loan management system, which is accessible to Lenders through an online log-in portal. The evidence is that only the Drawdown Notice dated 27 January 2016 and the two Drawdown Notices dated 28 January 2016 were uploaded to Debtdomain. On the day before the Drawdown Date, Ms Liu set the interest rate for the drawdown amount on LoanIQ, which then generated a "Rate Setting Notice" or a "Repricing Rate Setting Notice" recording the interest rate. Those notices were automatically emailed to the relevant Lenders. On the Drawdown Date, the relevant Lenders were required to transfer their proportion of the drawdown amount into NAB's clearing account, from where it was transferred to Arrium's transaction account with ANZ.
4. Ms Dinham accepted in cross-examination that neither NAB's Policies and Procedures manual relating to the management of syndicated loans nor any other document suggested that it was part of Ms Liu's responsibilities to check the representations and warranties. However, Ms Dinham said that her expectation was that members of her team (including Ms Liu) should check that the representations were contained in the Drawdown Notice, since they were an important part of the document. The objective evidence suggests that none of the Lenders accessed the Drawdown Notices that had been uploaded to Debtdomain.
5. BOC led evidence of reliance from two witnesses - Ms Shaohui Huang, the Chief Operating Officer of BOC in Sydney, and Mr Patrick Lynam, Chief Risk Officer with BOC, Sydney Branch.
6. Ms Huang gives evidence of the process of advancing funds to the Arrium Entities in accordance with Drawdown Intent Notices issued by NAB, which was a process supervised by her. She did not personally review any of the Drawdown Notices. She says that she expected that NAB would only issue a Drawdown Intent Notice if the associated Drawdown Notice was compliant with the terms of the 2013 SFA. She also says that if NAB had advised her that any of the Drawdown Notices did not contain the representations and warranties required by the 2013 SFA or had advised her that the Drawdown Notices disclosed an Event of Default or that Arrium was insolvent, she would not have authorised the advance.
7. Mr Lynam gives evidence that, in accordance with BOC's procedures, each customer is allocated a "PD" (that is, a probability of default) between 1 (lowest) and 15 (highest) and that BOC generally produced every four months a periodic review in relation to a customer and a more detailed annual review. BOC also classified poorer quality loans as "special mention", "substandard", "doubtful" or "loss", representing deteriorating levels of risk. At a meeting of BOC's credit committee on 19 March 2015 (which was chaired by Mr Lynam), a decision was made to classify Arrium as "special mention", which indicated that Arrium was experiencing difficulties which, if they persisted, could result in losses. That classification continued until the appointment of administrators on 7 April 2016. Also at the meeting on 19 March 2015, Arrium's PD score was increased from 6 to 8. It was increased again to 9 on 30 September 2015.
8. There were meetings of BOC's credit committee on 8 December 2015, 21 January 2016 and 26 February 2016. The relevant parts of the minutes of the meeting on 8 December 2015 are set out earlier in this judgment. The minutes of the meeting on 23 January 2016 relevantly record: An update on Arrium was sent to HO earlier this week. Subsequent information from media suggested that the bidding process for Moly-Cop (Arrium Mining Consumables) may not be going as well as CFO had previously indicated to RM because bidders have been asked to submit new bids. Bidding results are expected to be announced in February, 2015 [sic], together with Arrium's half-yearly results …
9. On 23 February 2016, Mr Lynam sent an email to BOC's head office recommending that Arrium's PD score be increased to 11. Mr Lynam says in his affidavit evidence that his recommendation followed publication by Arrium on the ASX of the GSO recapitalisation proposal. Mr Lynam's recommendation was accepted at a meeting of the credit committee on 26 February 2016 and implemented on 28 February 2016.
10. Mr Lynam says that at no time was he aware that Arrium was insolvent or that BOC had a right to refuse to advance funds to the Arrium Entities in accordance with the 2013 SFA in response to Drawdown Notices. He says that if he had been, he would have used his delegated authority as Chief Risk Officer to prevent the drawdowns from occurring.
11. Westpac led reliance evidence from Mr Owen. He gives evidence that in or around 24 April 2015, Westpac downgraded Arrium's credit risk grade (CRG) from D52 to E35, which involved a change in Westpac's assessment of the credit risk from being acceptable but not investment grade to marginal, below the standard acceptable for new business and requiring increased senior line management attention. From that time, Mr Owen's group began to monitor the file. In September 2015, Mr Owen's group prepared a Credit Approval Summary (CAS) that included a summary of the credit strategy relating to the exposure. That summary, which is dated 16 September 2015, assessed the CRG as F21, which involved a further downgrade and suggested that the customer was facing some difficulties which may be more than temporary, but not sufficiently great to conclude that a default or loss is "envisaged" (to use Mr Owen's word). The outlook was also described as "negative" because of the falling iron ore and steel prices.
12. Between 16 September 2015 and 24 March 2016, Westpac prepared a total of 8 CASs. Those up to and including 4 February 2016 retained a CRG of F21. The CAS dated 16 February 2016 does not state a CRG. The one dated 25 February 2016 stated that the CRG was G11 and the one dated 24 March 2016 dated that it was H4. Both changes represented further downgrades. H4 indicated that full collection of interest and principal was in serious doubt. Mr Owen says that he reviewed at least one of the Drawdown Notices on Debtdomain and that it appeared to him to be in the form required by the syndicated facility agreements.
13. On 9 February 2016, Arrium sent a Drawdown Notice under the Westpac Facility Agreement seeking to draw down CAD9,900,000 on 12 February 2016. According to Mr Owen, it was Senior Credit Analyst, Ms Jacqueline Smith's responsibility to review the notice to ensure that it complied with the form set out in the facility agreement and to bring anything unusual about the notice to the attention of Mr Owen. Mr Owen says that if any of the notice had been non-conforming, including if any of the representations and warranties were qualified, he would not have recommended that Westpac comply with the notice.
14. In the case of BBVA, reliance evidence was given by Ms Shui Yu Siu, who is the Head of Operations Control & Support Asia.
15. Ms Siu gives evidence of the practice that she and her team followed on receipt of a Drawdown Intent Notice or Repricing Intent Notice from NAB in relation to the syndicated facility agreements. It is apparent from that evidence that BBVA advanced funds in response to those notices. No one on Ms Siu's team looked at the Drawdown Notices themselves. However, Ms Siu says that based on her membership of BBVA's Loan Review Committee, she was aware that from August 2015, Arrium was assigned to "Watch List 3" in accordance with BBVA's internal classification and "Special Mention" in accordance with the loan classification system adopted by the Hong Kong Monetary Authority. Watch List 3 indicated that the borrower was experiencing difficulties which threatened BBVA's ability to be repaid in full. As a consequence, Ms Siu says she took special care to ensure that BBVA only advanced funds to Arrium if it was legally obliged to do so. She says that she would not have permitted funds to be advanced in response to a Drawdown Intent Notice if NAB had informed her that it had received a non-conforming Drawdown Notice or that the relevant Arrium Entity had disclosed an Event of Default had occurred - in particular that the borrower was insolvent.
16. As to the drawdown of USD20 million under the BBVA Facility Agreement in response to a Drawdown Notice issued on 11 February 2016, Ms Siu says that she checked whether the notice was identical to the required form set out in Schedule 3 of the BBVA Facility Agreement, confirmed that the requested amount was within the facility limit, checked that notice was signed by an Authorised Officer and informed BBVA's Treasury Team to arrange funding for the drawdown. Ms Siu says that she noticed that the Drawdown Notice contained an additional paragraph stating that the funds were to be drawn in US dollars. She regarded that addition as immaterial because it was a US dollar facility. Ms Siu says that if any of the representations and warranties contained in the Drawdown Notices had been deleted or if the notice had disclosed an Event of Default, she would not have arranged for the funds to be advanced.
17. It is apparent from the evidence that, like other Lenders, BBVA closely monitored Arrium's financial position and that that was the subject of frequent reports to the credit committee. Those reports were prepared by Mr Roberto Fernandez Jimena, who reported to the Chief Risk Officer. Mr Jimena swore an affidavit in the proceedings but was not called to give evidence. Extracts from minutes of some of the credit committee meetings have been set out earlier in this judgment. It is apparent from the minutes that BBVA was aware of the deteriorating prices for iron ore and steel and the effect that that was having on Arrium.
18. In the case of a claim for damages under s 236 of the ACL, the required causal nexus between the loss claimed and the misleading conduct is encapsulated in the word "because". The question is whether the loss in respect of which a claim is made happened because of the misleading conduct. That question is to be answered in the present case by asking whether, applying common sense notions of causation, it can be said that the conduct said to be misleading materially contributed to the loans being made and therefore to the losses arising from those loans: see Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 525 per Mason CJ, Dawson, Gaudron and McHugh JJ; March v E & MH Stramare Pty Ltd (1991) 171 CLR 506. It is usual to seek to answer such questions by asking whether the loss would have occurred but for the contravening conduct. In a passage quoted by the BOC Plaintiffs, Edelman J explained that test in these terms in Lewis v Australian Capital Territory (2020) 381 ALR 375; [2020] HCA 26 at [178]: [T]he test for causation of loss asks whether the wrongful act was necessary for the loss. The "but for" or counterfactual approach "directs us to change one thing at a time and see if the outcome changes". The change is the removal of the wrongful act. If the loss would lawfully have occurred but for the wrongful act then the wrongful act was not necessary for the loss. The counterfactual approach thus involves a hypothetical question where no other fact or circumstance is changed other than those which constituted the wrongful act. [footnotes omitted]
19. Applying that test, the BOC Plaintiffs say that the relevant counterfactual is either one in which the representations were not made or one in which they were qualified. According to them an appropriate qualification was one in which Arrium disclosed that an Event of Default had occurred because it was insolvent (if that was the case) or one in which it stated that there had been a change in financial position which constituted a Material Adverse Effect arising from the fact that the Gearing Ratio had decreased from 0.41 as at 30 June 2015 to 0.47 as at 31 December 2015, that the ICR had changed from 4.33 to 3.77 over the same period and that it was not likely that Moly-Cop would be sold for a price sufficient to enable Arrium to repay the facilities maturing in July 2017 and trade solvently thereafter. In either case, they submit that the funds would not have been advanced.
20. There are a number of difficulties with this submission.
21. First, there is a disconnect between the BOC Plaintiffs' case on causation and its case that the Drawdown Notices were misleading insofar as they made the MAE Representation. The MAE Representation is said by the BOC Plaintiffs to be misleading for three reasons. One is because there had been a material change in the Gearing Ratio. A second is because there had been a material change in the ICR. A third is that by 7 January 2016 it had become evident that there was no reasonable basis to expect that Arrium could obtain at least USD1.35 million for the Mining Consumables business. However, none of the reliance evidence given by the Lenders specifically address those matters. Rather, the reliance evidence is generic in nature and stated at a level of generality that makes it impossible to understand the reasoning process that forms the basis of the reliance.
22. Second, with one exception, there is no evidence that anyone checked to see whether the Drawdown Notices contained the relevant representations. There is no evidence that anyone from the BOC Plaintiffs did so. The evidence of the BOC Plaintiffs is that they relied on NAB to do so. However, NAB was not required to do so under the terms of its appointment as agent. It appears that it was not something required by NAB's internal policy and procedure documents. Ms Dinham said that it was something that she expected Ms Liu to do. But there is no evidence that that expectation was communicated to Ms Liu. Moreover, the evidence suggests that in a number of respects Ms Liu failed to do what was plainly required of her by NAB's internal procedures - such as uploading each Drawdown Notice to Debtdomain.
23. There is nothing surprising in the fact that it appears that no-one checked whether the Drawdown Notices made under the syndicated facility agreements contained the representations and warranties required by those agreements. Ms Dinham's group, and the corresponding groups in the BOC Plaintiffs, were focussed on formal aspects of administrating the loans. Each of the BOC Plaintiffs had separate groups who were responsible for the customer relationship and, in particular, in monitoring Arrium's financial circumstances and making decisions about how best to manage the obvious credit risk that they were facing. If they thought that it was worthwhile, it was open to them to investigate whether there were grounds for refusing to honour Drawdown Notices. It appears that they chose not to take that course. They must have appreciated that refusing to honour drawdown requests could have serious repercussions for Arrium's business. Before taking that step, they wanted to know what the outcome was of the sale of Mining Consumables.
24. The one exception is that Ms Siu checked the Drawdown Notice given under the BBVA Facility Agreement. However, the focus of her attention appears to be on the question whether the form of the notice corresponded to the form set out in the agreement. There is no evidence that the contents of the representations were important to Ms Siu. Ms Siu does not, for example, give evidence of any concerns she had about Arrium's financial position and the fact that she obtained some comfort from the representations contained in the Drawdown Notices.
25. Third, there is a difficulty in applying the "but for" test in this case because it is difficult to separate the contractual requirements in relation to the Drawdown Notices from the representations the Drawdown Notices contain. The "but for" test of causation requires that the only change that can be made in the hypothetical world is a change to the facts that constitute the wrongful act. Normally, that would involve an assumption that the misleading statements were not made. But in this case, the statements said to be misleading are required by the agreements. Consequently, the hypothetical assumption requires an assumption that a notice is given that does not comply with the relevant agreement. It might readily be concluded that a drawdown would not occur in those circumstances. But it is not possible to say whether that is because the notice does not comply with the terms of the agreement or because the lender is no longer being misled about Arrium's financial position. The Lenders cannot elevate their refusal in the hypothetical world to comply with the Drawdown Notice because the notice did not comply with the agreement as proof that they were misled by statements contained in the Drawdown Notice.
26. The alternative counterfactual seeks to avoid that problem but in doing so it substitutes one set of representations for another (qualified) set. But there are a large number of ways in which the representations can be qualified, which makes the formulation of an appropriate counterfactual difficult if not impossible. The formulation of appropriate qualifications will necessarily introduce additional representations which involves a departure from the requirement that the only change that should be made in the counterfactual world is one that removes the misleading conduct.
27. Fourth, as I have sought to explain, the evidence indicates that the opinions that the Lenders formed on the financial circumstances of Arrium and what was in their best interests given Arrium's financial position were formed as a consequence of their own analysis rather than the statements in the Drawdown Notices. As might be expected, the matters that were likely to affect Arrium's ability to comply with its obligations under the facility agreements were being monitored by the Lenders' respective credit committees, and it is plain that the decisions concerning what steps the Lenders would take to protect their interests were being taken by those committees and the relevant groups charged with the responsibility of overseeing loans which were at risk. There is no suggestion that anyone on any of those committees or a member of any of those groups placed weight on the representations contained in the Drawdown Notices.
28. The position is clearest in the case of the 2013 SFA. Under the terms of that agreement one of the representations on which the Lenders say that they relied was the representation that there had been no change in financial position from 31 December 2012 that had a Material Adverse Effect. However, the BOC Plaintiffs appear to have been of the opinion that such a change had occurred. Between 31 December 2012 and the dates Drawdown Notices were given under the 2013 SFA (7 January 2016 to 28 January 2016), BOC had reduced Arrium's PD score from 6 to 9 and classified it as a "Special Mention". Between the same dates, Westpac had downgraded Arrium's CRG from D52 to F21 and BBVA had classified Arrium as "Watch List 3" and "Special Mention". Downgrades had also occurred between 30 June 2015 and the relevant Drawdown Dates. On 16 September 2015, Westpac downgraded Arrium's CRG from E35 to F21. The minutes of the credit committee on 8 December 2015 record Mr Lynam as observing that the significant fall in iron ore prices would be causing Arrium stress. It is also apparent from those minutes that Westpac appreciated that there was a risk that the sale of Mining Consumables would not proceed and that if it did not "Arrium may have material difficulties". At the meeting on 29 January 2016, Westpac was specifically told that there was a potential write down in the mining business "but not so large as to threaten covenant compliance". It must have understood, however, that there would be a reduction in the relevant ratio. Similarly, in the loan review dated 28 January 2016, BBVA stated that Arrium was "in a difficult financial situation due to its high dependence on the iron ore price, which has deceased by more than 40% in the last year".
29. On the BOC Plaintiffs' case, many of these points may be irrelevant because the only changes in financial position they point to are changes in the Gearing Ratio, the ICR and the prospects of a sale of Mining Consumables. However, the evidence suggests that none of these matters were important to the BOC Plaintiffs. Westpac was told on 29 January 2016 that there were likely to be write downs in the value of the mining business, which would affect the Gearing Ratio. However, it continued to make advances after that date. It must have been apparent to the Lenders that Arrium's EBITDA was affected by the reduction in the price of iron ore and steel, which they knew about. Consequently, they must have appreciated that there was likely to be a reduction in the ICR. However, they continued to honour the Drawdown Notices.
30. So far as the sale of Mining Consumables was concerned, if there was a change in financial position that had a Material Adverse Effect, the change was a deterioration in the likelihood that Arrium would obtain an acceptable price for Mining Consumables. The Lenders must have appreciated that the sale of Mining Consumables was not going as well as might be hoped. In BBVA's loan review dated 28 January 2016 it was noted that market rumours "pointed to some insufficient debr", which appears to be a reference to the fact that there were market rumours that the sale price would be insufficient to enable Arrium to repay its Lenders. By late January, Westpac knew that only two bidders were left in the process and that Arrium was expecting final bids on 5 February 2016. Despite knowing those things, BBVA and Westpac continued to advance funds. If the final bid prices were important to Westpac's decision to fund, it is to be expected that it would have contacted Arrium shortly after 5 February 2016 to find out what the final bids were, but it did not do so. As I have explained, the likelihood is that the Lenders were willing to wait to see what the outcome of the sales process was before deciding what to do next.

Introduction

1. The Anchorage Plaintiffs divide their damages claim into two parts. First, they claim damages in respect of money advanced in response to the impugned Drawdown Notices (new debt). Second, they claim damages in respect of debt rolled over in response to the impugned Rollover Notices. In relation to the drawdowns, the Anchorage Plaintiffs claim the amount the Par Lenders advanced relying on the impugned Drawdown Notices together with interest (on the basis that the advances would not have been made but for the defendants' wrongful conduct) less the amount they have recovered in respect of that debt. Mr Brendan Halligan, an expert accountant retained by the Anchorage Plaintiffs, calculates that amount as $47,510,599.
2. In relation to the rollovers, the Anchorage Plaintiffs calculate the damages they claim in one of two ways. First, they do so by comparing the position the Par Lenders would have been in now (assuming the debts and causes of action had not been assigned) with the position they would have been in if the rollover debt had been paid in full on the date that it was due (referred to in submissions and the expert evidence as "Scenario 1"). That involves an identical calculation to the calculation in respect of new debt. It is the difference between the amount rolled over and the amount that has been recovered in respect of the rolled over debt. The calculation of damages on that basis was ultimately abandoned for the very good reason that the Anchorage Plaintiffs were unable to make good the assumption that, if the wrongful conduct had not occurred in relation to the Rollover Notices, the relevant debt would have been repaid in full. That assumption obviously did not sit easily with the Anchorage Plaintiffs' case that Arrium was facing a liquidity crisis and could not be maintained in the face of evidence given by Mr Tony Samuel, an expert accountant retained by HSF, to the effect that Arrium would not have had the financial capacity to repay all the debt that was rolled over.
3. The second way in which the Anchorage Plaintiffs seek to calculate their damages in relation to the rolled over debt (referred to as "Scenario 2") is to assume that if the impugned conduct had not occurred, the Par Lenders would not have agreed to rollover the debt, with the result that Arrium would have gone into administration on or about 31 December 2015. The Anchorage Plaintiffs' claim as damages the amount that has been recovered in respect of the rolled over debt and the amount that would have been recovered if Arrium had gone into administration on that earlier date. Mr Halligan calculates that amount as $47,728,347, making the total damages claim $95,238,946.
4. Although the BOC Plaintiffs' claim is only made in respect of new debt, their primary method for calculating damages is similar to the method adopted by the Anchorage Plaintiffs for rolled over debt. They say that their loss is to be calculated as the difference between the amount the BOC Plaintiffs have recovered and the amount that they would have recovered if Arrium had gone into administration on 7 January 2016. Ms Dawna Wright, an expert accountant retained by the BOC Plaintiffs, calculates that amount as being $99,647,142 before discounting and interest. In their List Statement, the BOC Plaintiffs advanced an alternative claim for damages that mirrors the claim advanced by the Anchorage Plaintiffs in relation to new debt - that is, they claimed damages as the difference between the amount that they advanced in response to the impugned Drawdown Notices and the amount that they have recovered in respect of that debt (plus interest). That method was not pursued in submissions. The BOC Plaintiffs submit that it has "several obvious problems". Specifically, they say it only compensates the BOC Plaintiffs in relation to advances made in response to the misleading conduct. It does not compensate them for loss on pre-existing debt. In addition, according to them, it fails to recognise that, but for the wrongful conduct, the impugned drawings would not have occurred, with the result that the dividend would have been different.
5. Before addressing the substantive issues raised by the damages claims, five preliminary points should be mentioned.
6. First, the defendants point out that the way the Anchorage Plaintiffs seek to put their case is not consistent with their pleading. In particular, nowhere do they plead a case that damages in relation to rollovers that occurred in response to the impugned Rollover Notices should be calculated by comparing actual recoveries with recoveries that would be made on the basis of a hypothetical earlier administration. Ms Sparkes, in particular, submits that the Anchorage Plaintiffs should be confined to their pleaded case. I do not accept that submission. Whilst it is true that the pleaded case is confined in the way that Ms Sparkes says it is, the case now sought to be advanced is consistent with evidence given by Mr Halligan. His report was served approximately one and a half years before the hearing. No point was taken at that time that the report addressed an unpleaded case. The defendants have not been taken by surprise. They filed evidence from Mr Michael Potter, an expert accountant retained by them, which addresses Mr Halligan's evidence in detail. Accordingly, the Anchorage Plaintiffs should be permitted to advance a case in accordance with the expert evidence they have served.
7. Second, as I have said, the BOC Plaintiffs did advance in their List Statement an alternative case that their loss is to be measured by the difference between the amount of the impugned drawdowns and the amount they have recovered in respect of those drawdowns. By a notice of motion filed on 8 March 2021, the BOC Plaintiffs sought an advance ruling under s 192A of the Evidence Act that certain notices of appropriation they had served on the liquidators on 5 March 2021 be admitted into evidence. Those notices were said to be relevant to that alternative case. Following the appointment of administrators, Arrium (and many of its subsidiaries) and its creditors entered into Deeds of Company Arrangement (together, the DOCA) and the Lenders (or Assignees, where the debt had already been assigned) entered into a document dated 30 September 2016 known as the Override Deed. The details of the Override Deed are not important for present purposes. It is sufficient to observe that by its terms the Deed Administrators acknowledged that the Lenders and Assignees (the Financier Creditors) were entitled to the distribution of any proceeds arising from the sale of certain assets, including Mining Consumables, in priority to other unsecured creditors. By the notices of appropriation, the BOC Plaintiffs sought to appropriate amounts received under the Override Deed to debts owed to them which were not the subject of the impugned Drawdown Notices. If effective and allowed into evidence, it was said that the consequence of the appropriation notices was to increase the amount received by the BOC Plaintiffs in respect of those debts and decrease the amount received by them in respect of debts the subject of the impugned Drawdown Notices, thus increasing their claim for damages.
8. I dismissed the BOC Plaintiffs' application and said that, to the extent necessary, I would give my reasons for doing so in this judgment. Having regard to the way in which the damages case was ultimately put, nothing turns on the appropriation notices. However, in my view there was a question whether the appropriation notices were effective which raised a factual question whether some previous appropriation had been made or whether the BOC Plaintiffs by their past conduct were prevented from relying on them. The defendants would have needed time to investigate that factual question. In addition, there was a real issue whether it was open to the BOC Plaintiffs to appropriate payments made some time ago for the purpose of their damages claim. The question of what damages the BOC Plaintiffs had suffered as a consequence of the impugned conduct was a question for the Court and was not one that could be manipulated by the appropriation of amounts recovered by the BOC Plaintiffs. Accordingly, it was my opinion that there was a likelihood that the defendants would be unfairly prejudiced if the notices were admitted that substantially outweighed any probative value the notices had and that therefore they should be excluded under s 135 of the Evidence Act. It was for those reasons that I made the ruling I did.
9. Third, the Anchorage Plaintiffs contend that, to the extent that the assessment of damages depends on a counterfactual, it was not necessary for them to prove that counterfactual on the balance of probabilities. Rather, they say that the Court is required to be satisfied that the proposed counterfactual "would have occurred as a matter of informed estimation". In my opinion, that is not correct. The Anchorage Plaintiffs rely on a number of decisions for the proposition they advance including Malec v JC Hutton Pty Ltd (1990) CLR 638; [1990] HCA 20 at 639-90; Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; [1994] HCA 4 at [22]-[24] and Berry v CCL Secure Pty Ltd (2020) 381 ALR 427; [2020] HCA 27. In the last of these cases, Bell, Keane and Nettle JJ explained the position in these terms: [32] By parity of reasoning with Malec and Amann Aviation, in Sellars it was held that, where a claimant established on the balance of probabilities that misleading or deceptive conduct contrary to s 52 of the TPA caused the claimant the loss of a commercial opportunity of some value (not being a negligible value), the value of that lost opportunity was to be ascertained by reference to hypotheses and possibilities which, though they were speculative and therefore not capable of proof on the balance of probabilities, could be evaluated as a matter of informed estimation. [33] Similarly, in this matter, if the state of the evidence were that, although it did not establish on the balance of probabilities that, but for Securency's misleading or deceptive conduct, the Agency Agreement would have continued beyond 30 June 2008, it nevertheless established that there was a more than negligible chance that, but for Securency's misleading or deceptive conduct, the Agency Agreement would have continued beyond that date, Dr Berry and GSC would have been entitled to claim that the measure of their damages fell to be determined by reference to the hypothetical possibility that, but for Securency's misleading or deceptive conduct, Securency would have waited a substantial time after 24 February 2008 before terminating the Agency Agreement. In that event, and subject to questions of the way in which the matter was conducted below, it would have been necessary to undertake an assessment of the likelihood of the various hypothetical possibilities and to compute an award based on that assessment. … [footnotes omitted]
10. As is apparent from this passage, the hypothetical with which each of these judgments is concerned is one involving a lost opportunity. The cases stand for the proposition that, if a plaintiff can prove on the balance of probabilities that it has lost a commercial opportunity of some value because of misleading and deceptive conduct, then it is entitled to recover the value of that opportunity, even if the prospects of it coming to fruition were less than 50 percent. But that is not this case. It is not claimed that the Lenders lost some commercial opportunity because of the defendants' misleading and deceptive conduct. Rather, the BOC Plaintiffs say, and must prove on the balance of probabilities, that the Lenders were worse off because Arrium was not placed into administration on 31 December 2015 rather than 7 April 2016. In order to prove that, they must prove that it was more likely than not that the Lenders would have received more in an earlier administration. They can only do that by proving on the balance of probabilities how much the Lenders would have received. It is the difference between that amount and the amount they did receive that represents the BOC Plaintiffs' loss.
11. Fourth, one consequence of the approach taken by the BOC Plaintiffs - which they not only accept but embrace as one of the advantages of the approach - is that it permits them to recover losses suffered by them on advances that were not made on the basis of impugned Drawdown Notices. There is a question whether there is a sufficient connection between those losses and the impugned conduct to be able to say that the losses happened because of the impugned conduct. That raises issues concerning the test of causation under s 136 of the ACL compared, for example, to the test of causation stated in the s 5D of the Civil Liability Act in respect of negligence claims. For reasons which will become apparent, it is unnecessary to consider those issues in the context of this case.
12. Fifth, the BOC Plaintiffs no longer press their claim against Mr Bakewell in respect of any drawdowns prior to 8 February 2016. Nor are they entitled to recover from Ms Sparkes losses arising from drawdowns that were made after 29 January 2016. However, the BOC Plaintiffs do not explain what adjustments should be made to their claims for damages to take account of those facts. The BOC Plaintiffs' primary case is that but for the impugned conduct, Arrium would have gone into administration on 7 January 2016. Consequently, its loss arose from the representations made in the Drawdown Notices issued on that date, not the later Drawdown Notices. But presumably some adjustment would have to be made for the fact that Mr Sparkes was not responsible for the drawdowns after 29 January 2016. On the other hand, it is difficult to see how Mr Bakewell can be held responsible for all the losses said to flow from the fact that Arrium would have gone into administration on 7 January 2016 when he was not responsible for the circumstances that led to that event. Nor does it seem logical to assess the loss arising from Mr Bakewell's conduct on the basis that Arrium would have gone into administration at some later date, since on the BOC Plaintiffs' case it would already have been in administration. It appears that the only way of assessing the loss for which Mr Bakewell is responsible is by taking the difference between the amount of the relevant drawdowns and the amount that has been recovered in respect of them. These points raise the question of the appropriateness of the BOC Plaintiffs' methodology generally.

The Anchorage Plaintiffs' claim in respect of new debt

1. There are only two issues between the accounting experts in relation to the Anchorage Plaintiffs' claim in respect of new debt. One is when the claim should be converted into Australian dollars, since that is the currency in which the Anchorage Plaintiffs seek judgment. The other is whether the Anchorage Plaintiffs are entitled to compound interest. The experts agree that they are both legal issues.
2. It is common ground that an award of damages should, so far as money can do it, put the innocent party in the position it would have been but for the wrongful conduct.
3. In Hungerfords v Walker (1989) 171 CLR 125, a decision that has been followed on countless occasions since, the High Court accepted that in appropriate cases, the Court could award compound interest as compensation for the loss of the use of money. In that case, the appellant accountants had negligently miscalculated the amounts of depreciation allowable as deductions in the income tax returns of the respondents over a number of years. The claim for repayment of the overpaid amounts was statute barred in respect of a number of years. Accordingly, the respondents sued the accountants for the overpaid tax. They also claimed compound interest as damages. That claim was upheld in the courts below. The Full Court of the Supreme Court of South Australia allowed interest at the rate of 20 percent per annum on the basis that the funds would have been used to repay loans that bore interest at that amount or would have been invested in the respondents' business and earned a return of at least that amount. However, following the trial judge, the Full Court reduced the amount calculated using that interest rate to take account of the possibility that part of the money would, if available, have been used for non-business purposes.
4. The decision to allow compound interest was upheld by the High Court. Brennan and Deane JJ explained the position in these terms (at 152): There is, in our view, a critical distinction between an order that interest be paid upon an award of damages and an actual award of damages which represents compensation for a wrongfully caused loss of the use of money and which is assessed wholly or partly by reference to the interest which would have been earned by safe investment of the money or which was in fact paid upon borrowings which otherwise would have been unnecessary or retired. On the one hand, there is no common law power to make an order for the payment of interest to compensate for the delay in obtaining payment of what the court assesses to be the appropriate measure of damages for a wrongful act. If such interest is to be awarded at common law, it must be pursuant to statutory authority. On the other hand, there is no acceptable reason why the ordinary principles governing the recovery of common law damages should not, in an appropriate case, apply to entitle a plaintiff to an actual award of damages as compensation for a wrongfully and foreseeably caused loss of the use of money. To the extent that the reported cases support the proposition that damages cannot be awarded as compensation for the loss of the use of a specific sum of money which the wrongful act of a defendant has caused to be paid away or withheld, they are contrary to principle and commercial reality and should not be followed.
5. In the present case, but for the wrongful conduct, the Lenders would not have advanced the funds that they did. Consequently, they would have retained the funds that they advanced in whatever currency the funds were held and presumably advanced those funds to other customers. Importantly, the Lenders' (and therefore the Anchorage Plaintiffs') loss is not to be measured by terms of the facility agreements under which the money was advanced, but rather by the terms on which they could have lent the money to other customers. It was open to the Anchorage Plaintiffs to lead evidence relevant to those matters. They did not do so. The defendants contend that, in the absence of evidence, the Court should not assume that the Lenders would have been able to advance the funds to other customers at similar interest rates.
6. I do not accept that contention. The Lenders were in the business of lending money and the likelihood is that if they had not lent money to Arrium they would have lent the money to other customers. In those circumstances, they are entitled to an award of compound interest to compensate them for that loss. The only question is what assumptions the Court should make about interest rate and currency absent evidence on those matters. Of course, the Anchorage Plaintiffs must give credit for the amount they have received in respect of debts in respect of which they make a claim.
7. Ms Sparkes submits that the Anchorage Plaintiffs are not entitled to advance a claim for compound interest because it was not pleaded. However, Mr Halligan's calculations included compound interest. The issue was the subject of expert evidence and argued at trial. For those reasons, in my opinion the Anchorage Plaintiffs were not prevented from advancing the claim.
8. While acknowledging that ultimately it is a legal question, Mr Samuel expresses the opinion that it would be appropriate to calculate interest at a simple rate at least from the date of administration because the Lenders would never have been able to obtain compound interest after that date. That view, however, rests on a misunderstanding. As I have explained, the amount that the Anchorage Plaintiffs are entitled to recover is to be measured by reference to what they would have earned if they had lent money to other customers. In my opinion, in the absence of any other evidence, it is appropriate to assume that the Lenders would have been able to lend the money they lent to Arrium to other customers at the same interest rate and that they would have lent the money in the same currencies. Accepting that assumption, the Anchorage Plaintiffs are entitled to recover compound interest at the rate at which they lent money to Arrium. It should be assumed that that money was lent in the same currencies, with the result that any conversion to Australian dollars should only occur at the date of judgment.
9. It may be that some discount should be made to the Anchorage Plaintiffs' claim for compound interest to allow for the possibility that the alternative loans would also be loss making. That would be consistent with the approach (not overturned by the High Court) taken by the Full Court in Hungerfords, which discounted the respondents' damages to take account of the fact that not all the overpaid tax would have been invested in the respondents' business or used to pay down debt. However, the point was not taken by the defendants; and in the absence of submissions on the issue, it would be inappropriate to discount the Anchorage Plaintiffs' claim for that reason.

The counterfactual

1. The counterfactual relied on by the Anchorage Plaintiffs in relation to their claim in respect of the Rollover Notices and the counterfactual relied on by the BOC Plaintiffs in respect of the whole of their claim are essentially the same. In the case of the Anchorage Plaintiffs, it is that Arrium would have gone into voluntary administration at about the time the first impugned rollover occurred (31 December 2015), presumably on the basis that the Lenders would not have permitted the rollover because the relevant Arrium Entity had not given unqualified representations and warranties required of it, Arrium would not have repaid the relevant amount and as a consequence the directors would have appointed voluntary administrators at that time. In the case of the BOC Plaintiffs, it is that Arrium would have gone into administration at the time the first impugned Drawdown Notice was issued (7 January 2016), presumably on the basis that Arrium would not have issued the Drawdown Notice because it could not make the representations it contained and without the additional funds the directors would have appointed voluntary administrators immediately.
2. Neither counterfactual, however, was the subject of evidence. Neither counterfactual was put to any of the directors. That is, it was never put to the directors that if the relevant drawdowns could not be made or the relevant loans rolled over, they would have put Arrium into administration immediately. No analysis was undertaken of Arrium's financial position as at those dates to demonstrate that it could not repay the amounts that were rolled over on 29 and 31 December 2015 or that it needed the USD43 million that was the subject of the two Drawdown Notices issued on 7 January 2016 immediately. Even assuming that it could not repay the amounts rolled over or needed the USD43 million in the near future, it is far from evident that the directors would have appointed a voluntary administrator immediately or that the Lenders would have suggested that they do so, particularly given the stage the sale of Mining Consumables had reached and the importance of all parties attached to that sale. What happened in April 2016 does not suggest that a voluntary administrator would have been appointed immediately. Just the opposite. It is apparent that the Lenders did not want to see Arrium go into administration and that they were willing to support Arrium to avoid that happening. Their attitude changed because they lost confidence in the board in circumstances where Arrium had made substantial drawings in January 2016 and the first half of February 2016 and then put forward and apparently insisted on the implementation of a proposal that would see the Lenders recover only 60 percent of the face value of their loans, including the money they had just lent. The position, however, would have been quite different in the hypothetical world. Presumably, the drawdowns and rollovers would not have occurred because Arrium would have alerted the Lenders to the fact that it could not give the required representations and warranties. At that stage the board had not committed the company to a course which depended on the Lenders agreeing to a substantial discount on their debt. Consequently, in the hypothetical world the relationship between Arrium and the Lenders would have been entirely different. The likelihood in those circumstances is that the Lenders would have been willing to support Arrium at least until the sales process of Mining Consumables was complete.

Assumptions made by Mr Halligan and Ms Wright

1. In constructing the hypothetical worlds that formed the basis of their opinions, Mr Halligan and Ms Wright have not taken as the starting point the known financial position of Arrium on 31 December 2015 or 7 January 2016 (they are likely to be materially the same) and sought to make projections from those dates about the likely course of events assuming the appointment of administrators on one of those dates and the likely returns that would be achieved based on Arrium's circumstances at that time. Instead, they have taken as their starting point the actual outcomes achieved and sought to make adjustments which are said to reflect what the position would have been assuming a voluntary administration at the earlier time. Moreover, in making those adjustments Mr Halligan was instructed to assume, among other things that (1) "the net value realised from … an orderly sale and wind down process would have been the same as the value in fact realised when and after the Arrium Group entered into voluntary administration on 7 April 2016"; and (2) the Arrium Entities would not have needed to draw down on any debt after 31 December 2015.
2. Similarly, Ms Wright was asked to assume, among other things that (1) "The realisation of assets in the counterfactual Administration would have occurred on the same date and for the same amount as in the actual Administration"; (2) "The sale of business entities in the counterfactual Administration would have occurred on the same date and for the same amount as the sale of business entities in the actual Administration"; and (3) no drawdowns were made under facilities to which the BOC Plaintiffs were a party on and from 7 January 2016. The only difference in the assumptions made by them is that on the assumptions made by Mr Halligan, Arrium's assets would have been sold for the same prices, but three months earlier. On the other hand, Ms Wright assumes that the assets would have been sold for the same price at the same time - that is, that there would have been a delay in the administration of three months.
3. The assumptions made by Mr Halligan and Ms Wright were not the subject of evidence. Instead, the plaintiffs invited the Court to infer that those assumptions were true. Plainly, however, both sets of assumptions cannot be true because Mr Halligan and Ms Wright assume that the sales would have occurred at different times.
4. In my opinion, the inferences on which the plaintiffs rely cannot be drawn. A critical assumption in relation to the sale of assets, of course, was the sale of Mining Consumables, which ultimately was sold by the administrators for USD1.23 billion in November 2016, substantially more than the prices offered in February 2016. It is not plausible that the same process would have occurred at the same time if Arrium had gone into administration three months earlier. The likelihood is that if administrators had been appointed on 31 December 2015 or 7 January 2016, they would have continued with the sale process. There is no suggestion that there were any flaws in that process. It was being conducted with expert assistance from UBS and Lazard. It is plain that the outcome was important to the Lenders. The likelihood is that the Lenders would have accepted one of the offers that was ultimately made in February 2016. There is no evidence that they believed at that time that a better price could be achieved if the sale was delayed. Arrium was not willing to sell at the prices offered because a sale at those prices would not solve its financial difficulties. However, that was not a consideration once Arrium was in administration. Rather, the only question was whether a better price could be obtained in the near future. It was uncertain at that time whether it could.
5. The BOC Plaintiffs submit that if Arrium had gone into voluntary administration, it would have been necessary either to postpone or to abandon the sale process while the guarantees given by the Mining Consumables entities to the Lenders were sorted out. According to them, that was a complex issue which was not resolved until six months after Arrium went into administration. However, three points may be made about that submission. First, there is no evidence before the Court that would establish that the issues that needed to be resolved before Mining Consumables could be sold would necessarily take a long time to sort out, particularly if those issues were holding up a process that the Lenders were obviously keen to see completed. It was open to the BOC Plaintiffs to lead evidence on the course of the actual administration to establish that similar delays were likely to occur in the hypothetical administration. They are matters, for example, they could have cross-examined Mr Madden on. The pressure on the Financier Creditors to reach agreement on the terms of the Override Deed would have been entirely different if administrators had been appointed in the middle of the sales process. Consequently, it cannot be assumed that they would have taken the same time to put in place an agreement between them to permit the sale to occur. Second, if the position was that the appointment of administrators would have caused a substantial delay in the sales process, that provides a strong reason for concluding that it was unlikely that the Lenders would have supported the appointment of administrators at that time. Third, even if the sale of Mining Consumables had to be delayed in the hypothetical world, that still does not demonstrate that the price that would have been obtained for Mining Consumables would have been the same as was obtained in November 2016. The likely explanation for the difference between the prices offered in February 2016 and the price obtained in November 2016 was a change in market sentiment. There is no evidence of when that change occurred. The likelihood also is that if Arrium had gone into administration at an earlier point in time, Mining Consumables would have been sold earlier. It was for the BOC Plaintiffs to prove that the administrators would have been able to get the same price as they did at that earlier point in time. They have not done so.
6. Nor do I accept that it can be assumed that the same price could have been achieved for Arrium's other assets if it had gone into administration earlier. Absent any evidence to the contrary, and contrary to the assumption made by Ms Wright, the likelihood is that if Arrium had gone into administration three months earlier, its assets would have been sold three months earlier than they were. No attempt was made by the plaintiffs to analyse the sale of Arrium's other assets to demonstrate that the market conditions were the same and therefore similar prices could have been expected if the businesses and assets had been sold three months earlier. It is apparent that the markets in which Arrium operated were cyclical and volatile. Consequently, the timing of any sale of its businesses and assets could have had a substantial effect on the price obtained for them. In fact, the evidence suggests that market conditions improved during 2016, which helps to explain why Mining Consumables was sold for a substantially higher price at the end of the year compared to those offered in February 2016. For example, a graph included in Ms Sparkes' affidavit of the iron ore price up until August 2016 shows that the price reached an historic low in December 2015 and was substantially higher in August 2016. There were large fluctuations in price between those two dates. However, the price remained well above the historic low, although it dropped substantially in May and June 2016 and increased again after that. Ms Sparkes' graph simply shows actual price, whereas it is the forecast price at particular dates that is likely to affect the price buyers were willing to pay for the iron ore assets. The point remains, however, that the price fluctuated substantially, and it is to be expected that the sentiment of buyers would do so as well. Consequently, it cannot be assumed in the absence of any evidence that the price achieved at one time was a reasonable indication of what might have been achieved three months earlier.
7. As to the assumption that in the hypothetical administration Arrium would not have needed to draw down on any debt after 31 December 2015, the BOC Plaintiffs submit that it is clear that it would not have needed to do so. They point out that Arrium had cash of $303.6 million as at 31 December 2015. According to evidence given by Ms Wright, in a hypothetical administration Arrium would have experienced a trading result somewhere between a profit of $2.4 million and a loss of $57.3 million. On the other hand, they say that the administrators would have collected a further approximately $200 million from debtors during the administration - which is the equivalent cash collected by the administrators between 7 April 2016 to November 2016. Moreover, they say that the amount of $597 million paid to trade creditors between 1 January to 31 March 2016 and the interest paid to Lenders would not have been paid. The BOC Plaintiffs submit that it is plain from those figures that there would have been sufficient cash available for the administration. They also say that Mr Samuel and Mr Potter conceded as much when giving oral evidence.
8. In my opinion, the position is not as clear as the BOC Plaintiffs claim that it is. Mr Samuel and Mr Potter said that they had not considered the issue in detail. The difficulty with the BOC Plaintiffs' analysis is that they use the position as at 31 December 2015 as a proxy for the position as at 7 January 2016. However, 31 December 2015 is not a good proxy for the position as at 7 January 2016 because of the reporting initiatives undertaken by Arrium at year end to reduce debt. As Mr Potter explains in his report, one step Arrium had taken was to sell its accounts receivables under a factoring facility which resulted in the large cash at bank balance at 31 December 2015 of $303.6 million. As a result, it cannot be assumed that the administrators in the hypothetical administration would have been able to collect the same amount in trade debtors as was collected in the actual administration. Moreover, as Mr Halligan points out, Arrium deferred paying trade creditors in the amount of $189.7 million. It cannot be assumed that those trade debtors remained unpaid as at 7 January 2016. I accept, however, that the likelihood is that any additional borrowing would have been relatively small and is unlikely to have had a material effect on the damages calculation.
9. The assumption that Arrium would have gone into voluntary administration at the beginning of 2016 but for the impugned conduct and the assumption that Arrium would have been able in the hypothetical administration to sell its assets and business for the same price as it obtained in the actual administration are both critical to the conclusions reached by Mr Halligan and Ms Wright. Neither assumption has been made out. For that reason alone, the conclusions of Mr Halligan and Ms Wright cannot be accepted and the plaintiffs have failed to prove their loss based on a case that Arrium would have gone into administration at the beginning of January 2016 but for the defendants' breaches of duty. It is, therefore, unnecessary to consider Mr Halligan and Ms Wright's evidence in any detail. I should, however, say something about some of the issues raised by Mr Potter and Mr Samuel in relation to that evidence which were the subject of submissions.

Other issues relating to the calculation of the loss

1. Both Mr Potter and Mr Samuel accept the general approach taken by Mr Halligan and Ms Wright, which involves making adjustments to the actual position to arrive at the hypothetical position. However, they take issue with a number of those adjustments, and a great deal of evidence was devoted to the question of what adjustments should be made in circumstances where all the experts conceded that the available evidence did not allow for precise calculations and required estimates and assumptions to be made. The analysis was complicated by the fact that major changes occurred to Arrium's financial position between 31 December 2015 and 7 April 2016, not least because of the unwinding of the reporting initiatives and the drawing down of approximately $372 million in impugned debt.
2. Standing back from the detail, however, several observations can be made. First, it is not suggested that between 31 December 2015 and 31 March 2016 (which was used as a proxy for 7 April 2016, since precise figures were known for the earlier but not the later date), Arrium made substantial losses. Mr Samuel says in evidence that it made a small cash operating profit, which Mr Halligan says was $8.6 million. Ms Wright records it as making a trading loss of $16.9 million, but, if correct, that is not significant in the scheme of things. Accordingly, it cannot be said that the Lenders were substantially worse off because Arrium incurred trading losses over the three months. It seems likely that if Arrium had gone into administration three months earlier, some cost savings would have been made. There was, however, no real evidence of what those savings would have been or how they should be determined. Mr Potter, when giving oral evidence, suggested that they could be as much as $60 million, but that figure must be understood as an allowance that he was prepared to make for the purposes of the calculations under consideration rather than a considered estimate of the losses. Moreover, it is unclear whether Arrium would have earned the same income as it did if it had been under administration. That issue was not the subject of considered evidence from any expert. Mr Halligan does point to the fact that in the first six months of the administration, the administrators earned a cash profit of $155.5 million, which equates to approximately $26 million per month. However, it is important to bear in mind that, in calculating that profit, the administrators were not liable for past expenses.
3. Of critical importance is the fact that the Lenders did advance the additional $372 million and ultimately received dividends of approximately 80 cents in the dollar in its place. The Lenders were obviously worse off to the extent that they did not recover the full amount of the drawdowns. However, the Anchorage Plaintiffs make a separate claim in respect of that loss. They were also worse off to the extent that the total pool of provable debts increased as a result of those additional advances. But in the case of the Anchorage Plaintiffs, that increase would be limited to advances made by the BOC Plaintiffs, since, as I have said, to the extent that it includes advances made by Lenders in respect of whom the Anchorage Plaintiffs make a claim, the relevant losses are claimed separately. On the other hand, it might be thought that in the actual compared to the hypothetical world the Lenders were better off because the pool of assets from which dividends were payable had been increased by the $372 million. Of course, it is not that simple, since much of the $372 million was not kept in cash but used in Arrium's business. It is unclear how it was used but it is reasonable to infer from an analysis undertaken by Mr Potter that it was largely used in paying trade creditors and investing in the business. As a result, trade creditors were reduced (resulting in a higher dividend for remaining creditors than would otherwise have been paid) and it is likely that the value of Arrium's businesses were increased or at least costs were incurred that would have been incurred by the administrators in the hypothetical administration. In any event, in my opinion it was for the plaintiffs to prove that some or all of the $372 million was wasted as part of proving their loss, since it was for the plaintiffs to prove the likely outcome of the hypothetical administration. Although framed somewhat differently, much of the debate between the experts turned on these issues.
4. Mr Potter and Mr Samuel say that, to the extent that the $372 million was used to pay trade creditors, it is already taken into account in the models they rely on since, as Mr Samuel explained, "the actual distribution rates capture actual creditors and the hypothetical distribution rate captures hypothetical creditors, best estimates of those figures". However, according to Mr Potter and Mr Samuel, that leaves an amount of approximately $260 million. Mr Potter treated that amount as an increase in asset values comprising two parts. One was a change in cash debtors and inventory (excluding Mining Consumables assets) totalling $127.6 million. The other was items of expenditure over the period totalling $132.9 million comprising capital investment expenditure and other items which were largely transaction and restructuring costs. However, he was prepared to concede that that figure should, perhaps, be reduced to $200 million to allow for savings that the administrators would have been able to achieve in the event of an earlier administration. Mr Halligan makes no adjustment for that amount in his calculations for two reasons. First, he says that there is insufficient information to be able to do so. Second, he says that there are two off-setting items. One is based on the idea that the hypothetical administration could have lasted three months longer and the administrators would have earned a profit during that time, consistently with the profit they earned in the first six months. The other is based on the unwinding of the reporting initiatives.
5. Three points may be made about Mr Halligan's response. First, as I have explained, absent any evidence, it is reasonable to infer that the $372 million was used productively in the business (including by paying creditors). The onus was not on the defendants to prove that it wasn't. Second, there is no reason to assume that the hypothetical administration would have lasted longer than the actual one. In my opinion, it is reasonable to assume, absent some evidence to the contrary, that the hypothetical administration would have been conducted in the same way as the actual administration and that steps taken in the administration would have taken the same length of time. Third, it is not easy to understand Mr Halligan's point about the reporting initiatives. The point appears to be that the reporting initiatives included deferring the payment of $189.7 million of accounts payable until after 31 December 2015, when they were subsequently paid. Consequently, in the actual world, those accounts payable were paid and there was a corresponding reduction in Arrium's assets. On the other hand, in the counterfactual world, those accounts payable would not have been paid and the $189.7 million would have been available for distribution between creditors. I do not accept that analysis. The important comparison was between the position at 31 December 2015 with the position at 7 April 2016. The unwinding of the reporting initiatives was reflected in the position at 7 April 2016. To make a further allowance for it would involve double counting.
6. For those reasons, I am not persuaded that the Financier Creditors would have been better off if Arrium had gone into administration on 31 December 2015 (once they are compensated for losses suffered in respect of the impugned drawdowns), even on the assumptions made by Mr Halligan.
7. The position is not as clear in the case of the BOC Plaintiffs. Unlike Mr Halligan, Ms Wright accepted that any analysis of the BOC Plaintiffs' loss must take into account any benefits arising in the actual world from the fact that Arrium received the impugned drawdowns. Like Mr Potter, she sought to assess those benefits by looking at changes in Arrium's working capital between 31 December 2015 and 31 March 2016. Ms Wright assumed that Arrium's cash balance as at 7 April 2016 was $125 million and on that basis she calculated that there was, in fact, a decrease in working capital between 31 December 2015 (as a proxy for 7 January 2016) and 31 March 2016 (as a proxy for 7 April 2016) of $30.3 million. That is, according to her, as a result of movements in working capital there was an additional $30.3 million available to be distributed in the hypothetical world. In reaching that conclusion, she made an adjustment of $70.6 million for additional creditors at the earlier date. She did not make any adjustment for capital investment expenditure and the other items which Mr Potter identified as being largely transaction and restructuring costs, on the basis that there was no evidence that they contributed to an increase in the value of Arrium's assets. Set out below is a table taken from a spreadsheet prepared by Ms Wright comparing her position with that taken by Mr Potter in relation to working capital adjustments: Wright Potter Cash and cash equivalent 178.6 8.2 4 January Drawdowns 58.3 Debtors (179.2) (178.8) Inventory 43.2 43.0 Creditors (70.6) Total working capital movements 30.3 (127.6) Capital and investment expenditure (55.9) Other Potter items (69.2) Asset sales 2.5 Tax payments (10.3) Potter assumed lower value 30.3 (260.5)

1. In their final written submissions, the BOC Plaintiffs accept that Ms Wright's figures understate the cash held at the date of administration and that the appropriate cash figure is $295 million. They also accept that if 31 December 2015 is used as a proxy for 7 January 2016, then it is not appropriate to include the 4 January 2016 drawdowns totalling $58.3 million, which results in an adjustment to Ms Wright's figures of $228.3 million. On that basis, the BOC Plaintiffs accept that there should be a working capital adjustment of approximately $198 million, which is very close to Mr Potter's suggested figure of $200 million. However, the components are different. Ms Wright's figure includes a $70.6 million adjustment for creditors. Mr Potter and Mr Samuel were of the opinion that that involved double counting because, according to them, the movement in creditors was already included in the assumed distribution rates. On the other hand, Ms Wright makes no allowance for capital and investment expenditure or transaction and restructuring costs.
2. Having regard to the ultimate position of the parties in relation to the calculations and the conclusions that I have formed on the BOC Plaintiffs damages claim generally, there is little point in attempting to analyse the underlying disputes in any detail. It is sufficient to say that I prefer the approach of Mr Potter and Mr Samuel.
3. In my opinion, the approach taken by Ms Wright to capital and investment expenditure and transaction and restructuring costs has the effect of reversing the onus of proof. There can be no question that between 31 December 2015 and 5 April 2016, Arrium received $372 million that it would not have received in the hypothetical world. It is the BOC Plaintiffs' case that that hypothetical world can be created by, in effect, working backwards from the actual world. In order to do that, it is necessary to subtract the $372 million. If the BOC Plaintiffs' case is that it is not necessary to subtract the whole of the $372 million because part of it was wasted (in the sense that it did not lead to an increase in asset values and was not used to discharge a liability) then the BOC Plaintiffs bore the onus of establishing that was the case. They have not discharged that onus in relation to the contested items of expenditure.
4. As to the adjustment of $70.6 million to account for a reduction in creditors between 31 December 2015 and 31 March 2016, it was, as I have said, Mr Samuel and Mr Potter's evidence that that involved double counting. It is not entirely clear from the evidence given on this topic whether that is true or not because it appears to depend on a detailed understanding of the way in which Ms Wright's model works. However, Mr Potter and Mr Samuel state that it was taken into account in their models because they used the actual figures for creditors at the two dates, with the result that the actual and hypothetical distributions based on the total value of creditors at the relevant dates already accounted for the movement in creditors. That, it seems to me, is a logical approach. As Mr Potter pointed out in oral evidence, it seems odd to include a movement in creditors as representing a change in distributable assets when the creditors are not an asset and they are the persons making claims to distributions which in turn affect the amount distributable to the Financier Creditors.
5. There are some other minor differences between Ms Wright, Mr Potter and Mr Samuel. They only have a marginal effect on the calculation of damages and were not specifically addressed by the parties in their submissions. Allowing for those differences suggests a degree of accuracy in the overall calculations which does not exist. If it ever becomes necessary to determine the question of damages, further calculations and submissions will be necessary. Consequently, there is no point in addressing those issues in the present context. There are, however, several other issues raised by the BOC Plaintiffs about which I should say something.
6. One issue between the experts is what percentage premium should be applied to the Financier Creditors' distributions to reflect the fact that the Financier Creditors received a higher distribution than other creditors in the actual administration. Mr Potter and Mr Samuel used the figure of 9.7 percent, which was the figure they agreed with Mr Halligan. Ms Wright used a figure of 9.0 percent, which had the effect of decreasing the damages slightly. On the available evidence there is no real reason for choosing one figure over the other. Consistently with the principle that the BOC Plaintiffs should not recover more than they claim, I would have chosen the figure adopted by Ms Wright.
7. Second, it is agreed between the experts that in determining the creditors as at 31 December 2015 it is necessary to increase the figure stated in the accounts to allow for the fact that the debts owing to a number of creditors crystallised on the appointment of administrators. Mr Potter uses the actual figure in the administration of $320 million. Ms Wright seeks to derive the percentage increase in the actual administration and applies that percentage to the known trade creditors to arrive at a figure of $294 million. Both methods involve estimates. Both have their advantages. Accordingly, I would have split the difference between the experts.
8. A third issue concerns the date on which amounts expressed in foreign currencies are converted into Australian dollars. The question to be determined is the difference in the position the BOC Plaintiffs are in with the position they would have been in under a hypothetical administration that occurred three months earlier. I have already indicated that unless there is a good reason for making a different assumption, it should be assumed that what happened in the actual administration would have happened in the hypothetical one three months earlier. Under the actual administration, debts were converted to Australian dollars on the date of the administration. No good reason has been advanced for assuming that a different result would have been reached in the hypothetical administration. Accordingly, it should be assumed that the same principle applies.
9. The last issue concerns discounting and interest calculations. Ms Wright discounts cash flows in the hypothetical and actual world at the risk-free rate to 31 December 2015 (which she takes to be the loss date) and then applies interest at Court rates to arrive at the damages payable to each Bank. I would not have applied that approach. In my opinion, it has the effect of artificially increasing the BOC Plaintiffs' damages. In my opinion, a better approach is simply to allow interest on the actual and hypothetical cash flows from the dates the relevant amounts were or would have been paid and to calculate the loss as the difference between those amounts.

Contributory negligence and concurrent wrongdoer defences

1. As I have said, the defendants raise contributory negligence and concurrent wrongdoer defences. Having regard to the conclusions I have reached, it is neither necessary nor practical to express a view on these defences. In order to do so, it would be necessary to know the basis of the defendants' liability. Accordingly, I do not deal with these issues in this judgment.

Mr Bakewell's cross-claim against HSF

1. Mr Bakewell brings cross-claims against HSF in both proceedings. The cross-claims in both are similar. In each it is alleged that (1) HSF gave advice in relation to solvency on 18 December 2015 (the solvency advice) and advice in late December 2015 that Arrium should drawdown the remaining facilities and deposit the amount drawn down with a non-lender bank (the drawdown and deposit advice), which at no time was amended or withdrawn; (2) HSF owed Mr Bakewell a duty of care in relation to the advice that it gave; (3) if the plaintiffs succeed against Mr Bakewell, the advice was negligent and misleading and deceptive in contravention of s 18 of the ACL; (4) but for the advice, Mr Bakewell would not have engaged in the conduct which has visited liability on him; (5) accordingly, he is entitled to recover as damages from HSF the amount of his liability.
2. In my opinion, the cross-claims must fail for a number of reasons. It is convenient to deal with the solvency advice first.
3. It seems clear that the solvency advice was given. It had two aspects. First, there is the memorandum presented to the board which explains the legal test of solvency and which relevantly states that "A company will be insolvent now if it can be said with certainty, or practical certainty, that there is no way it will be able to deal with a debt falling due at some future date". Second, there was the oral advice from Mr Nestel to the effect that (to quote from the minutes of the meeting) "there is not an insolvent trading issue at this time given the time until the Company's next significant debt maturity and the work currently under way, but that given the Company is operating under different circumstances than it has been before, the board should consider receiving more regular information on liquidity".
4. It is plain that the solvency advice is not relevant to the Anchorage Proceeding, since no allegation is made in that proceeding that Arrium was insolvent at any relevant time. The advice can only be relevant to the BOC Proceeding and the conduct alleged to have been engaged in by Mr Bakewell that is said to give rise to his liability in that proceeding. In substance, as the case was finally put, that conduct is that Mr Bakewell authorised the Drawdown Notices dated 9 and 10 February 2016. Consequently, Mr Bakewell's case must be that he would not have authorised those notices but for HSF's advice. Moreover, the BOC Plaintiffs claim that Arrium was insolvent at that time not because it could not pay its trade creditors as and when they became due. Rather, the case is that it could not pay its debt to the Lenders falling due in July 2017 and later. The case against HSF must be considered on the basis that that is the case that succeeds. Understood in that way, it is difficult to see how Mr Nestel's oral advice could be relevant. That advice was plainly to the effect that Arrium was not insolvent in December 2015 because it had sufficient liquidity to pay its trade creditors but that going forward the position needed to be monitored more closely. Even assuming that having given that advice Mr Nestel came under some duty to inform the board (and Mr Bakewell) that circumstances had changed to the point where Arrium was no longer solvent, on the BOC Plaintiffs' case the occasion for that advice never arose because there was no suggestion that Arrium became insolvent for that reason during the relevant period - that is, up until mid-February 2016.
5. Mr Bakewell's case, therefore, must be that the real problem with HSF's advice was with their legal analysis and, in particular, their test of "practical certainty" as applied to debts payable in the future. That was plainly a statement of legal opinion. To be actionable in negligence, it was necessary for Mr Bakewell to establish that HSF did not exercise reasonable care in forming or expressing the opinion. To be actionable under s 18 of the ACL, it would necessary to prove that HSF did not have a reasonable basis for the opinion: Bateman v Slatyer (1987) 71 ALR 553 at 559 per Burchett J. Mr Bakewell has made no attempt to establish either of those matters. For the reasons I have given, in my opinion, HSF's advice was substantially correct. But even if that conclusion is wrong, it seems to me it was a conclusion that was reasonably open on the authorities. That is a fatal difficulty with the cross-claim.
6. Having reached that conclusion, it is unnecessary to deal with the other elements of Mr Bakewell's case. I should, however, say something about the question of reliance and causation. The relevant hypothetical is one in which HSF would have given the correct advice. On the BOC Plaintiffs' case that advice would have been to the effect Arrium was insolvent if it was more likely than not that it would not be able to repay the loans falling due in 2017 and beyond. It cannot be part of the hypothetical that Mr Nestel actually advised Arrium (or Mr Bakewell) that, in his opinion, Arrium was solvent applying that test. It was one thing for Mr Nestel to express an opinion on solvency on the basis of the then existing cash flows and what he understood was the relevant test. It is quite another thing for him to have expressed an opinion on solvency if that opinion required him to form a view on whether it was more likely than not that Arrium would be able to repay the Lenders when their debts fell due.
7. If the board and Mr Bakewell had been told what the correct test was (on the BOC Plaintiffs' case), I am not satisfied it would have made any difference. No evidence was led by Mr Bakewell on that question and he made no submissions on it. Mr Bakewell was prepared on 16 February 2016 to state that there had been no material change in the financial position of Arrium since 30 June 2015 that would have a Material Adverse Effect on Arrium's ability to comply with its obligations under the facility agreements evidence. It would be strange if, a week earlier, he had thought that it was more likely than not that Arrium would not be able to repay the Lenders when their debts fell due and that consequently, given the correct advice, he would not have authorised the Drawdown Notices that were issued at that time. Moreover, as the factual narrative set out earlier demonstrates, although a number of scenarios that were modelled showed that Arrium would be unable to repay the Lenders unless they agreed to write-off some of their debt, that was not true of all scenarios. In particular, the presentation by UBS and Lazard at the board meeting on 11 February 2016 indicated that the Amend and Extend (no haircut) option was a viable option on the "Equity Upside Scenario". That adopted the then independent forecasts for commodity prices, which might reasonably be thought to be the most likely outcome. Mr Bakewell does not explain why, in the light of that information and the correct legal advice, he would not have authorised the drawdowns for which he is said to be responsible.
8. That leaves the drawdown and deposit advice.
9. If the claim against Mr Bakewell had succeeded in the Anchorage Proceeding, it would be because (to simplify): 1. Mr Bakewell gave the Bakewell Direction and was negligent in doing so; 2. Mr Bakewell negligently failed to ensure that the MAE Representation was true; 3. Mr Bakewell procured the MAE Representation which was made negligently or in breach of contract; or 4. Mr Bakewell was involved in a contravention of s 18 of the ACL (and its equivalents) arising from the falsity of the MAE Representation.
10. If the claim had succeeded against Mr Bakewell in the BOC Proceeding it would relevantly be because Mr Bakewell, by giving the Bakewell Direction, authorised the representations made by virtue of the Drawdown Notices dated 9 and 10 February 2016 and, in doing so, authorised the making of the MAE Representation.
11. It is easy to see the connection between the case that Mr Bakewell is liable for the Bakewell Direction and the claim that HSF is liable to Mr Bakewell because of the drawdown and deposit advice. Mr Bakewell's case is that but for the drawdown and deposit advice he would not have given the Bakewell Direction and therefore would not be liable for its consequences.
12. It is, however, difficult to see what the connection is between the other claims against Mr Bakewell and the drawdown and deposit advice. Mr Bakewell's submissions are silent on the question. Unless it is said that the drawdown and deposit advice led to the Bakewell Direction which in turn led to the impugned drawdowns there is no connection between the advice and Mr Bakewell's liability.
13. But even assuming that Mr Bakewell's claim against HSF is limited to a case where he is found liable for the Bakewell Direction, there are two fundamental problems with it.
14. First, I am not satisfied that the drawdown and deposit advice was given. The only evidence that that advice was given by HSF in December 2015 was evidence given by Mr Bakewell of a conversation he had with Mr Nestel between 10 and 17 December 2015. It seems clear that the main purpose of the conversation was to discuss Mr Nestel's advice that Arrium should not repay debt and should instead keep any surplus in cash, to avoid incurring new debt. Mr Bakewell says that during the conversation Mr Nestel also suggested that Arrium may as well draw down all remaining amounts under the facilities. In my opinion, it is likely that Mr Bakewell has confused the two concepts. There is no objective evidence that Mr Nestel said anything about drawing down the remaining amounts under the facilities. In his email dated 23 December 2015, he reminds Mr Bakewell of his advice about not repaying debt. If the idea of drawing down the remaining amounts was discussed during the same conversation, it is to be expected that Mr Nestel would have referred to that as well. The position appears to be that the idea of drawing down the remaining amounts came from Mr Edwards, not Mr Nestel and that Mr Bakewell has confused the advice given by Mr Nestel with the advice given by Mr Edwards. It is true that Mr Nestel did not give evidence but was obviously available to do so. Nonetheless, Mr Bakewell bears the onus of proof on the issue and I am not satisfied that he has discharged that onus.
15. There is evidence that the proposal to drawdown all remaining amounts under the facilities was discussed with Mr Nestel on 8 February 2016. It appears that the idea had been discussed at the board meeting on 4 February 2016 and that the board had given its tacit if not actual approval to the idea at that time. It is not clear who followed up implementation of the proposal with Ms Pearce. Ms Pearce suggests that it could have been Mr Nestel. However, that seems unlikely since the conversation (whoever it was with) prompted a call from Mr Bakewell and Ms Pearce to Mr Nestel to discuss the proposal. It might be thought that it would be unnecessary for Mr Bakewell and Ms Pearce to speak to Mr Nestel about the proposal if Mr Nestel had already advised Ms Pearce that it should be implemented. It is unclear what advice Mr Nestel gave during the conference call. Ms Pearce's note of the conversation records the following (among other things): - not in breach - no EOD [Event of Default] - point of drawing? Maintain liquidity, we will be entitled but they may refuse. It is impossible to work out from these notes what advice Mr Nestel gave and on the basis of what assumptions the advice was given. For example, the reference to "not in breach" and "no EOD" could easily be a reference to what Mr Nestel was told. Mr Bakewell has no recollection of the conversation.
16. Second, and following on from the point made in the previous paragraph, it cannot be assumed that the scope of Mr Nestel's advice (even if he gave it) corresponded to the scope of the Bakewell Direction. If Mr Bakewell is liable in respect of the Bakewell Direction it is because he gave the direction and in doing so became, in some way or another, liable for the fact that the MAE Representation was false. However, it does not follow that in giving the drawdown and deposit advice Mr Nestel was saying anything about the ability of the Arrium Entities to make the MAE Representation. Mr Bakewell's claim seems to be that in giving the drawdown and deposit advice, Mr Nestel was impliedly representing that the Arrium Entities could make the MAE Representation in the Drawdown and Rollover Notices. However, no such case is pleaded and any such case seems improbable. It could not seriously be suggested that Mr Nestel was in a position to form an opinion on whether there had been a change in Arrium's financial position since 30 June 2015 or 31 December 2012 so as to give rise to a Material Adverse Effect or that Mr Bakewell relied or could reasonably have relied on any view impliedly expressed by Mr Nestel on that question. Mr Bakewell was in a far better position to form a view on that question himself. Some of those matters appear to have been discussed during the conversation on 8 February 2016. However, what was said to or by Mr Nestel on the subject is entirely unclear. Moreover, it seems implausible that Mr Bakewell relied on advice from Mr Nestel that the Arrium Entities could make the MAE Representation (assuming the advice was given) when he has no recollection of the conversation. In my opinion, any advice Mr Nestel gave to the effect that Arrium should not repay debt and should drawdown on the remaining facilities would have to have been understood as advice that it should do so provided that at the time it actually served the relevant notices it was satisfied that it could make the representations the notices contained.
17. Accordingly, had it been necessary, I would have concluded that Mr Bakewell's cross-claim against HSF would have failed even if the case against him had succeeded.
18. These conclusions make it unnecessary to deal with a number of other issues raised by HSF. However, I should refer to one of them having regard to the attention it received during submissions. It is plain that the advice given by Mr Nestel in December 2015 included advice that Arrium should not repay debt but instead should deposit spare cash with a non-Lender financial institution, obviously with a view to avoiding incurring new debts. It is equally plain that Arrium did not follow that advice. HSF submitted that it was not open to Mr Bakewell to pick and choose which parts of Mr Nestel's advice to follow and to claim damages based on that part of the advice that he did follow but not give credit for any benefit that would have flowed from that part of the advice he did not follow. They point out that no attempt was made by Mr Bakewell to quantify the value of any benefit that he received. Consequently, according to them Mr Bakewell had failed to prove his loss. Although there is force in this point, it is not clear to me that the onus of proof on this issue lay with Mr Bakewell. The point raised by HSF appears to be a point akin to a mitigation or contributory negligence point. The case is that if Mr Bakewell was going to rely on HSF's advice then he should have followed the whole of the advice rather than only part of it and, if he had, his liability would have been lower. Put like that, the submission raises the question whether Arrium was able to follow the advice or whether it had already given irrevocable notice that it intended to repay part of the debt and whether it was reasonable to expect Arrium to follow that part of the advice, given the consequences it might have had for its half yearly financial report. It also raises the question of who bears the onus of proof in relation to the benefits that would have flowed from following the advice. Having regard to the conclusions I have reached, it is not necessary to express a view on these questions, although I am inclined to think that the onus lay with HSF.
19. I should mention one other point in relation to the cross-claims against HSF. During the course of the hearing, Mr Bakewell sought to amend the cross-claims by adding two particulars. One alleged that Mr Pike, Mr Andrew Rich and Mr Apathy of HSF attended the Arrium board meeting on 4 February 2016 at which time a memorandum of Mr Bakewell dated 2 February 2016 regarding liquidity and a report of UBS and Lazard regarding Project Columbus were discussed. The other alleged that advice was sought from HSF on the preparation of the 31 December 2015 accounts and that HSF knew or ought to have known of the correspondence with KPMG on the emphasis of matter issue. Those amendments were opposed by HSF and the question of whether the amendments should be allowed was left to be determined in this judgment. Having regard to the conclusions I have reached, nothing turns on the amendments. However, had it been necessary, I would have permitted the amendments. The amendments plead background facts that were already the subject of evidence and were part of the facts against which the scope of HSF's duty of care was to be assessed. In my opinion, HSF could not have been prejudiced by the amendments.

Conclusion and orders

1. It follows from what I have said that both proceedings and the cross-claims must be dismissed. If the parties cannot agree on costs, I will hear argument on that question at a time to be fixed with my Associate.
2. The orders of the Court, therefore, are: 1. Proceeding 2018/104383 (including the cross-claim) be dismissed. 2. Proceeding 2019/316305 (including the cross-claim) be dismissed. 3. Direct that within 28 days of the date of this judgment the parties either: 1. bring in short minutes of order to give effect to their agreement on costs; or, 2. if they cannot reach agreement, contact my Associate with a view to relisting the matter to deal with any outstanding questions in relation to costs.

Endnote

1. Wording in square brackets not to be included in any Drawdown Notice for a Rollover Drawing.

Amendments 17 August 2021 - corrected typographical error on coversheet 18 August 2021 - paragraph [275] - changed "Martine Olde" to "Quentin Olde". DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 18 August 2021