Martin John Green in his capacity as liquidator of Arimco Mining Pty Limited (in liquidation) v CGU Insurance Limited & Ors

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

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JUDGMENT The proceedings 1 These proceedings concern a claim against CGU Insurance Limited Insurance as the Directors and Officers insurer of Arimco Mining Pty Limited (in liquidation) (Arimco) and its directors and officers. CGU issued a Directors and Officers Policy [No. 02DO 0265146] to Arimco and its directors, such Policy incepting on 31 December 1998 and continuing up to 31 December 1999. The policy also provided D&O Insurance to the directors and officers of the ARL Group. 2 The ARL group, through Arimco, mined gold and copper, at its Mt McClure, Mt Selwyn and Gidgee mines. 3 The proceedings are brought by virtue of leave having been obtained under section 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946. The plaintiff is Mr Martin John Green in his capacity as liquidator of Arimco who seeks an order, pursuant to section 588M of the Corporations Act, that the directors pay to the liquidator an amount alleged to be equal to the loss or damage suffered by creditors in relation to debts incurred by Arimco at a time when he alleges that it was insolvent. 4 As originally constituted, the proceedings were brought also against the relevant directors and officers (being Roy Swan, John Roberts, Colin Smith and Donna Stubbs), and against the administrator of the estate of the late Philip Pearce (his wife Carol Pearce) and against CGU Insurance in relation to Mr Pearce by virtue of section 51 Insurance Contracts Act. 5 A settlement was effected between the plaintiff and the parties other than CGU on 7 July 2006 whereby the directors (who are taken to include Ms Stubbs) and Mrs Pearce as executor agreed to a judgment being entered against each of them for $15 million but with certain terms concerning payments to satisfy those judgments. Although CGU was a party to the mediation which resulted in that settlement, CGU declined to participate in the settlement. 6 The claim is an insolvent trading claim under section 588M of the Corporations Act. The allegation is that Arimco was insolvent from 1 February 1999. 7 On 14 March 1999 Mr Green was appointed Voluntary Administrator of Arimco and, on 7 May 1999, the creditors of Arimco voted to wind up the company and appointed him as liquidator. On 15 November 2004, the court ordered that Arimco be wound up and that Mr Green be appointed liquidator. 8 The claim is in respect of debts said to total $21,217,765.47 and to have been incurred between 1 February and 14 March 1999.

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"As the evidence emerged it became clear there was a serious question whether, even if the contingency had been brought to the attention of the respondent, it might have been expected to make any difference to her decision. This question was then addressed by the respondent in evidence belatedly and in the opinion of the trial judge unconvincingly. There is an aspect of such a question which may form an important part of the context in which a trial judge considers the issue of causation. In the way in which litigation proceeds the conduct of the parties is seen through the prism of hindsight, because if a foreseeable risk has eventuated and harm has resulted, the particular risk becomes the focus of attention, but at the time of the allegedly tortious conduct there may have been no reason to single it out from a number of adverse contingencies or to attach to it the significance it later assumed. Recent judgments in this Court have drawn attention to the danger of the failure after the event to take account of the context before or at the time of the event in which a contingency was to be evaluated. This danger may be of particular significance where the alleged breach of a duty to care is failure to warn about the possible risks." [at 15] emphasis added. 16 The events with which the proceedings are concerned occurred approximately 10 years ago. The evidence called from the underwriters and the evidence called from the directors suffered from the problems of endeavouring to avoid reconstruction with the benefit of hindsight, in a circumstance in which that exercise was mostly impossible. Likewise a huge amount of the evidence called from the respective experts involved their having had access to documents and materials post-dating the end of December 1998 so that even where large sections of the reports were ultimately not read, it could not be said that the hindsight factor had not influenced many of the opinions expressed in these reports. Hence the Court has been astute to monitor the evidence so as, wherever possible, to take account of the context in which particular evidence came forward. Overview of the types of issue litigated 17 The matters which were litigated involved a close examination of the financial position of Arimco embracing the performance of the mines. Mr Green's affidavit of 8 March 2007 [on which he was not cross examined] provided a skeletal overview of particular matters. Sections of this affidavit are appropriate to be set out although the whole of the affidavit is before the Court. Some of the matters which are referred to in Mr Green's affidavit are referred to later in the reasons where considerable more detail becomes important. 18 Hence although Mr Green's affidavit was not challenged by CGU, in certain respects the matters which were litigated exposed some additional and some different conclusions to those to which Mr Green had deposed. The findings in relation to these matters are also set out in the reasons which follow. Summary of Arimco's mining operations 19 The ARL Group, through Arimco, operated the following mines:

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ii. on a consolidated basis, ARL and its controlled entities, including Arimco which was described as the "economic entity". 25 On 3 September 1998 the Audit Committee considered the draft financial statements for the financial year ending 30 June 1998. The Audit Committee resolved to recommend to the board of directors that the financial statements be adopted. 26 On 24 September 1998 the ARL Group's auditors, KPMG, signed the audited financial accounts in the Annual Report for the financial year ending 30 June 1998 (Annual Report). The content of this report is described further below. 27 On the same day, at a meeting of the ARL board of directors, the directors considered the Annual Report and resolved to adopt it. 28 As at the end of September 1998, according to the ARL Group's management accounts for the month of September 1998, the ARL Group had a cash balance of $12.45 million, which funds included the $10.2 million received from the Rights Issue. 29 Arimco, which was not a reporting entity and which was operated by ARL, did not produce its own cashflows. The ARL cashflows, which are reflected in the management accounts are, however, indicative of Arimco's cashflow given that it was Arimco which was the operating entity of the ARL Group. October and November 1998 30 After the approval of the Annual Report at the meeting of the board of directors on 24 September 1998, the ARL board met on two further occasions in 1998, on 30 October 1998 and 26 November 1998 respectively. 31 At the ARL board meeting on 30 October 1998, the directors had available to them the financial and operational performance of the ARL Group for the month of September 1998, in particular the September 1998 Financial Overview. 32 At the ARL board meeting on 26 November 1998 the directors had available to them the financial and operational performance for the month of October 1998, in particular, the October 1998 Financial Overview. 33 According to the minutes of the ARL board meeting held on 26 November 1998:

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iv. " That Martin John Green be appointed Administrator of the Company ". Appointment of receivers 77 The following day, on 15 March 1999, Rothschild appointed Andrew Love, Peter Geroff and John Trevor of Ferrier Hodgson as receivers and managers of Arimco. The receivers managed the charged assets of the company, and maintained possession of most of the ARL Group's books and records, up until their retirement on 19 December 2000. 78 On 6 February 2001 CGU informed the directors of ARL and Arimco that "CGU denies liability to provide any indemnity in respect of any such claim" under the D&O Policy by letters each dated 6 February 2001 to each of the directors. 79 On 7 July 2006, the proceedings pursued by Mr Green against the second to sixth defendants were settled for the sum of $15 million [the effect of the terms of settlement are dealt with in the reasons]. 80 Mr Green has not paid any dividends to the creditors of Arimco. The witnesses 81 A brief overview of witnesses called by the parties is appropriate. The approach taken is to introduce the witnesses in the order in which they were called and in some cases to note the executive summaries informing the extensive analyses provided in the voluminous reports [backed by extensive documentation]. Where appropriate some observations are made in the reasons concerning the reliability of particular witnesses. The Court does take into account the fact that where particular witnesses [whether as experts retained by a party or being persons such as the underwriters who were cross-examined], were instructed to make extensive assumptions as to particular matters, they would likely have been heavily influenced by the character of those assumptions in the giving of their opinions, even where large segments of their affidavits or reports were not read. As previously observed, the findings are based on the whole of the evidence and a commonsense approach to the acceptance or rejection of particular evidence is taken by the Court in terms of its evidentiary weight. The plaintiff's case in chief 82 The plaintiff in aid of its case in chief called:

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[32] It is right in our opinion to concentrate on the language of the Act and to derive its intended meaning and operation from that language. Approaching the issue for decision in that way, it is significant that the Act uses the words "accept the risk" in s 21(1)(a) and not a phrase such as "to enter into the contract of insurance" or, "to renew a contract of insurance" the former of which is in substance used in the introductory words to the section. The words, "accept the risk" are key words. The second reading speech and the explanatory memorandum make it clear that they were deliberately chosen. The words may have a long settled meaning at common law. That does not however mean that the Act was an enactment of it. The common law was generally concerned with materiality. This Act is concerned with relevance. Another indication that the decision, whether the matter should be disclosed, is a decision about the relevant risk, rather than, for convenience, what we will call the "commerciality" of the contract of insurance, is given by the reference in s 21(2) of the Act to the "disclosure … that diminishes the risk". The focus of attention is upon the risk , ie the particular insurance hazard . It is not, as such, upon the much broader question of the commercial willingness of the insurer to accept the risk, still less emotional or individual reactions to that question. Assessment of the risk , ie the insurance hazard, is susceptible to objective ascertainment. Assessment of other considerations including commercial and emotional responses, would ordinarily be much less readily ascertained on retrospective assessment. We do not consider that there is any particular difficulty in keeping these concepts separate as the language of the Act requires. The Act focuses on the particular risk of the insurance propounded. The alternative hypothesis opens a Pandora's box involving a large range of other considerations, such as are illustrated by the facts of the present case. 100 The section 21 test for disclosure was described by the High Court in CGU Insurance Limited v Porthouse [supra] in the following terms:

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123 That the 'significant changes' to the mines were relevant to CGU's decision is demonstrated by the following: The suspension of the Cockburn Deeps Project i. Mt McClure had for some years been ARL's largest producer. The Cockburn Deeps project, together with an identified one at Gidgee, had been the most highlighted project in the Annual Report. The Report stated that production from this project was anticipated to commence early in 1999. It was budgeted to be far and away the biggest contributor to production at Mt McClure in the first half of 1999 and was to produce more than half of the total production for Mt McClure for that period. ii. A possible replacement (Stage 3 of the Cockburn Open Pit Mine) was under consideration in December 1998 but only recently it had been assessed by ARL as uneconomic at current gold prices and examination of it was incomplete. Even if shown to be economic, the project would have required a capital investment of $5m. Further, the project would not become cashflow positive for a year after its commencement. The declining circumstances at Selwyn mine i. By the end of October 1998, Selwyn was in a significant loss making and negative cash flow position, with losses likely to increase as the copper price fell, as it did, after the end of October. ii. The falling copper price had impacted adversely on Selwyn's copper operations as ARL's copper price hedges had become inoperative and it was locked into an unfavourable US$ exchange rate. iii. The Selwyn gold production operations were also in difficulty because the Starra 276 mine, which was budgeted to produce about 50% of Selwyn's gold production and about 25% of its copper production for 1998-9, had continuing problems. The poor gold grades which gave rise to the concern led to the downgrading of Starra 276 reserves by about 50% as at 31 December 1998. While the directors could not have known about this revision at the relevant time, they expected in December that it would have to occur. Problems at Gidgee mine i. Similarly, Gidgee's operations were in trouble, with the Omega mine having had to close early and severe grade problems being experienced. Mr Swan acknowledged that in November and December 1998 he was very concerned about the performance of Gidgee. Based on current reserves, Gidgee had a mine life of only 12 months or less as at early November 1998. 124 In the result, the evidence established that the position of the mines in November and December 1998 stood in marked contrast to the robust picture of them presented in the Annual Report. As the effective operation of the mines was key to the financial soundness of the company and its capacity to continue operating through the term of the insurance, the finding is that the matters relating to the mine were matters which a reasonable person in the circumstances could have been expected to know to be relevant to the insurer's decision to accept the risk. The financial situation 125 Unsurprisingly these adverse positions at the mines were reflected in the overall financial position of ARL. 126 The liquidator's case is that there was nothing particular about the events of July to December 1998 that put the company into any different position financially from the one it had been in at other times during its history. There was therefore, on his case, nothing to put the directors on notice of any material matter that might affect the profitability of the company, and therefore require to be disclosed to the insurer. 127 As noted by CGU, there is a fundamental tension between this claim and the liquidator's proposition that by 1 February 1999, only one month after the insurance came into effect, the company was insolvent. 128 The liquidator sought to resolve this tension by contending that:

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iii. A large contributor to the loss of $5.4m can be seen to be $3.353m in respect of "change in inventory-bullion". Even after being given overnight to investigate the question, Mr Gibbons was unable to explain this adjustment in stock which had the effect of substantially increasing the January loss and was contrary to the direction in which he would have expected the stock of ARL to have moved in January. Mr Gibbons agreed that, on examination, it transpired that this stock adjustment was the reason why, to use the words in his report, "the cost of sales blew out significantly" in January. 130 The upshot is that the loss in January 1999 cannot be regarded as having been established to be anywhere near $5.4 million. Rather, it would appear to have been $2.5 million or less, being at a level that reflected a continuing downward trend rather than any set of dramatic unexpected events in January. 131 The large cash outflow in January 1999 of ($6.9 million) was mainly due to the payment in January 1999 of creditors outstanding in December 1998. Again, this did not reflect the occurrence of any dramatic, unexpected events in January 1999. Rain, mechanical and operational issues and falls in the copper price 132 Similarly, the evidence failed to establish that there had been any unusual events in January, in the realm of mechanical failures or other operational issues, which would have lead to a sudden and surprising change in Arimco's financial situation. 133 The cross examination of Mr Goldner, who was the witness most likely to have detailed knowledge of what occurred at the mines in January 1999, but who had not refreshed his memory from the detailed mine and Internal Monthly Reports before swearing his affidavit, shows that what occurred in January 1999 was neither dramatically different from what had occurred before, nor unexpected. In the cross examination, Mr Goldner was taken to detailed documentary records of what occurred which contradicted the liquidator's case on this issue. 134 Mr Goldner, Mr Ryan and Mr Swan acknowledged that the contemporaneous documents provided the best indication of what happened in January 1999. These documents establish that:

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iii. the use of rights issue funds to pay creditors [Noting that, although the directors did not know that this was occurring in December 1998, they were aware that this would become inevitable in the following year]. 140 The fact that the directors recognised that significant financial changes had occurred is born out by the fact that they requested a revised budget be prepared in November 1998. The November board Financial Overview described reporting of the group's projected results as having been "postponed until the more realistic site re-forecasts are completed". 141 The fact that there were temporarily no financial forecasts available to the board while revisions were made is not in itself something that a reasonable person would know to be relevant to an insurer's decision. As Ms Cuthbert conceded, the mere fact that revised forecasts were needed does not reflect poorly on the board absent some unreasonable delay in preparing the revised forecasts. Nonetheless, the matters which lead the directors to call for the revised forecasts were each significant departures from the financial situation of the company as disclosed in the 1998 Annual Report. As such, the finding is that a reasonable person would have known that these were matters relevant to the insurer's decision, and which they had a duty to disclose. The rights issue moneys 142 Another matter which, in the circumstances, should undoubtedly have been notified to the insurer, is the directors' knowledge, in December 1998, that the rights issue moneys would need to be utilised in order to pay creditors in January. It is clear that such a matter would have been known by a reasonable person in the circumstances to be relevant to the insurer's decision whether to accept the risk and if so on what terms. 143 This conclusion is supported by the evidence of Mr Gibbons, who, under cross examination, gave evidence that in normal circumstances a financier would be concerned that use of funds such as the rights issue funds for other than their specific purpose would raise questions as to the potential liability of directors for misuse of funds. It would also have been an indicator that the company was under severe financial stress. 144 There is also evidence that the directors themselves were aware of the serious implications of the use of the rights issue funds. None of the director witnesses asserted that the rights issue proceeds were available, without restriction, for payment of creditors, and several directors expressed the view that their understanding was that the rights issue funds were not available for the payment of general creditors:

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iii. Detailed analyses had been undertaken in November and December 1998 by Rothschild and communicated to ARL (facsimiles of 9 November and 8 December 1998 at CB 4/1168 and 1453). The outcome of the analyses was very negative so far as ARL's position was concerned and there were no countervailing indications from Rothschild suggesting that the outcome of the review in January might nevertheless be favourable to ARL. 147 Rothschild is a specialist financier in the mining industry and experienced in the resources sector. It is one of the world's leading resource bankers with exposure to the mining industry by way of general financing. It had been the sole banker to ARL for a number of years. ARL provided Rothschild with information on a regular basis concerning the operation of its mines, including monthly performance reports and projections. 148 The description which follows of the dealings between Rothschild and ARL in the period November 1997 to December 1998 demonstrates that Rothschild carefully and closely monitored ARL, was concerned about ARL's ability to produce cashflow and its mining operations and was prepared to advance or extend facilities only when Rothschild's position was fully protected. There is nothing surprising about an experienced financier taking this position but it confirms that ARL could not expect any indulgence from Rothschild if, as reasonable people in the position of the directors of ARL would have anticipated as likely, Rothschild's review in January 1999 did not have a favourable outcome. History of the relationship between ARL and Rothschild 149 Late in 1997 ARL requested that Rothschild allow it to defer repayment of a facility that ARL had with Rothschild. 150 On 10 November 1997, Mr Ryan met with Mr Spencer and Mr Murray of Rothschild. Mr Spencer was ARL's account manager and a mining engineer or analyst who had performed annual reviews of ARL's mining operations over the previous years, including visits to various mines. Mr Ryan perceived Mr Spencer to have expertise in mining matters and to have knowledge of ARL's mining operations. Mr Murray was the relationship manager. 151 Rothschild had called the meeting to discuss operations, finances, corporate activities and an annual review. During that meeting Rothschild advised that deferral of the ARL facility repayment at that time was difficult due to the performance of Rothschild's operations over the last few months and the repeated non-delivery of "next month" style improvements. Mr Ryan agreed that Rothschild's position was difficult but advised that insistence on repayments from the start of January 1998 would make cashflow very tight. 152 Arising from this discussion Rothschild was to be provided with weekly production reports and other internal cashflow projections that would allow it to determine the cash state of the company. Mr Ryan was also to provide a weekly comment to Rothschild. 153 During that meeting there was also discussion as to how ARL was going to fund the "cash drain" particularly as the existing Arimco $7 m facility was fully drawn. Mr Ryan indicated that closing Gidgee was "on the table" if the situation did not improve. Closure costs for Gidgee were estimated at about $5 m. 154 Mr Ryan asked whether Rothschild would consider converting part of its debt into equity. Mr Murray said that Rothschild could purchase equity on market and that the situation had changed considerably from when it had asked for equity options in August 1997. Mr Murray said that Rothschild was not so much uncomfortable with the debt position as uncomfortable with the cashflow. The debt was covered by $28 million of ITM hedging and the projects, but the ability of the company to generate surplus cash in the short term was a concern. 155 Mr Murray's note of the meeting, concluded:

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"Things at Australian Resources are going to be very tight over the next few months and a lot is going to (and has to), change in the operations. RAL is attempting to build up its knowledge to ascertain the best form of attack/involvement from here and is going to have to monitor the position very closely." 156 From late 1997 ARL provided Rothschild with weekly production reports and internal cashflow projections. 157 A further meeting occurred on 20 January 1998 involving Mr Spencer, Mr Pearce, Ms Anderson and others. Discussion included the performance of, future prospects and cashflow forecasts for each of the mines and it was decided that ARL would prepare an 18 month corporate cash forecast for presentation to Rothschild on 22 January 1998. That presentation occurred on 23 January 1998. 158 On 31 March 1998, Rothschild wrote to ARL and Arimco offering variations to three current facilities provided by Rothschild to those companies, and two new facilities. These facilities are discussed in greater detail in 11.4 to 11.25 of Mr Dorfan's report. 159 The first facility was a facility between Rothschild and Arimco, referred to as the Arimco Facility. It was originally dated 26 June 1995 and had been varied several times thereafter. Rothschild proposed to vary the Arimco Facility to reduce the limit from $9 million to $5 million. Further the amount of $5 million outstanding was to be repaid by 10 monthly repayments of $500,000 from 30 April 1998 to 31 January 1999. This was subject to conditions precedent including the repayment of $4 million on the existing Arimco facility. 160 The second facility was a Guarantee Facility between Rothschild and ARL originally dated 13 December 1994 and which had been varied subsequently. The proposed variations involved a reduction in the guarantee limit from $2.5 million to $1 million with amounts outstanding under the facility to be cash collateralised as to 25% by 31 December 1998, 50% by 31 March 1999 and 75% by 30 September 1999. 161 The third facility was a hedging facility between Rothschild and Arimco, originally dated 25 August 1992 and varied several times subsequently. The proposed variations included a reduction in the net risk position limit from $35 million to $20 million. 162 The fourth facility was a new facility offered by Rothschild to ARL, and known as the Convertible Note Facility. Pursuant to the Convertible Note Facility, Rothschild was to purchase notes convertible into ordinary shares of ARL for a total face value of not more than $4 million. The purpose of the convertible note facility was to repay $4 million of the Arimco facility (thus satisfying the condition precedent for the Arimco Facility discussed above). 163 The fifth facility was also a new facility, the Mt McClure Acquisition Facility, pursuant to which Arimco would borrow up to $5.2m for the purpose of acquiring the remaining 36.65% interest in Mt McClure. Fees were payable according to a schedule set out at CB1/335. The amount of the fees was a function of the amount drawn under the facility. The fees were onerous. The $5.2m was to be repaid in full by 31 March 1999. 164 The offer contained in the 31 March 1998 Rothschild letter was accepted by ARL and Arimco on 31 March 1998. 165 On 16 April 1998, Mr Spencer provided to ARL a copy of Rothschild's cashflow model used to calculate project and loan life ratios. This model shows a detailed understanding of ARL's mining activities and includes a sensitivity analysis, which showed that the facility ratios were sensitive to changes in the gold and copper price and ore grades. Ms Anderson, a de facto director, was to review the model. 166 According to the minutes of ARL's Due Diligence Committee, in late May 1998, Rothschild agreed to extend the repayment date on the Mt McClure facility from 31 March 1999 to 31 July 1999 on the condition that ARL maintained a "blocked" cash deposit account equal to the amount owing. This is further evidence of the cautious approach taken by Rothschild. 167 On 3 June 1998, Rothschild wrote to Arimco and ARL offering variations to the Mt McClure facility. In particular, the expiry date was extended from 31 March 1999 to 31 July 1999. However, it was subject to a condition that ARL raise no less than $10 million net through the sale of equity by 31 August 1998, otherwise the expiry date would revert to 31 March 1999. The fee schedule was to be varied to reflect the extended expiry date. 168 This offer was accepted by Arimco and ARL on 5 June 1998. 169 On 28 July 1998, Rothschild wrote to Arimco and ARL concerning further variations to the Arimco facility. 170 The variations included a further reduction in the amount of that facility, from $5 million to $3.5 million, and an extension of the repayment date from 31 January 1999 to 31 July 1999. Further, the amount of $3.5 million was to be repaid by 7 monthly repayments of $500,000 each, commencing on the last business day of January 1999 and ending on the last business day of July 1999. 171 In the same letter, Rothschild agreed to vary the 3 June 1998 offer letter concerning the Mt McClure Facility by extending the date by which $10 million had to be raised through the sale of equity from 31 August 1998 to 31 December 1998. 172 These proposals were accepted by Arimco and ARL on 31 July 1998. 173 On 10 September 1998, Rothschild wrote to ARL offering to permit the seven monthly repayment of the Arimco facility to commence at the end of July 1999. Rothschild expressly retained an absolute discretion to give notice cancelling the extended repayment date, such that repayments would commence at the end of January 1999. 174 On 18 September 1998, Rothschild wrote to ARL foreshadowing a review of the Rothschild facilities and expressing an interest in receiving a feasibility study for Cockburn Deeps. The review was to start with a thorough review of each of the three mines and would involve visits to each of the mines. The review would be a detailed review including each of the matters listed at page CB2/817 including life of mine projections. 175 On 29 September 1998, Rothschild confirmed that Arimco had placed $5.2 million on deposit with Rothschild on 25 September 1998. The deposit represented part of the funds received by ARL from its recently completed equity raising. Rothschild confirmed that the special conditions under the offer letters had been met and that the Mt McClure Facility expiry date was unconditionally extended to 31 July 1999. 176 On 12 and 13 October 1998, Mr Spencer and Mr Ward of Rothschild visited Selwyn and/or a mining analyst. Mr Ward had a financial background. 177 On 2 and 3 November 1998, Mr Spencer, together with a geologist, Mr Rosenstreich visited Gidgee and Mt McClure. 178 On 9 November 1998, Rothschild wrote to ARL. The Rothschild facsimile sets out in detail a series of matters that had arisen as a result of the site visits undertaken by Rothschild to the mines. The numbers used by Rothschild in that facsimile came from information provided by ARL. 179 The facsimile expressed negative views with respect to each of the mines. Mt McClure and Gidgee were said to have a mine life of approximately 12 months. Selwyn was said to have a mine life of approximately 17 months, with the 276 mine making a negative contribution to cashflow. Gidgee was also said to have little (if any) value in a conventional banking model. 180 The facsimile concluded with some general remarks in which Rothschild suggested that there be further discussions. Rothschild stated:

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It may be worthwhile for Mike Rosenstreich to review geological sections with John Roberts next time John is in Perth. I would like to meet and discuss the best way for Rothschild to continue its review process." 181 The Rothschild 9 November 1998 facsimile identified issues important to ARL's financial position and ongoing operations. It was a matter of significance to Mr Roberts and the other directors because Rothschild was ARL's only banker and a substantial amount of money owed to it was due in the following year, in circumstances where ARL was dependent on the favourable exercise of discretion by Rothschild as to whether any extension would be granted. 182 The receipt of this facsimile was matter of "grave concern" to Mr Roberts and the other directors of ARL. Mr Swan's evidence was that the reaction of the directors was one of concern that the facsimile "came through so negative" and that he said to Mr Roberts that it was a worry that Rothschild had sent the facsimile. It was the subject of discussion among the directors and managers and in the case of the directors both prior to and at the November board meeting. The board minutes record, under "Visits to mine site" that Mr Ryan provided an update on Rothschild's comments after the visits to the mine sites. 183 Mr Robinson, the mining expert called by CGU, agreed with the Rothschild analysis, and Mr Roberts conceded that Rothschild's approach of confining its interest only to minerals which could be shown to be capable of economic extraction from the ground was a perfectly reasonable approach for a banker to take. 184 The resolution of the 26 November 1998 board meeting to revise the budgets, including as a prerequisite, the forecasts for each mine effectively meant that from 26 November 1998 the existing cashflow and production projections were to be disregarded. Indeed after the November board meeting no forecasts were prepared or included in the financial overviews. The passage of time without those revisions occurring, in circumstances where the Rothschild facsimile required an urgent response indicated that what Rothschild had sought could not be provided. As Mr Swan conceded the Life of Mine plans sought by Rothschild in order to complete its review weren't provided prior to 31 December ("they take a long time to generate"). There were many reasons why ARL was not in a position to reforecast Selwyn. The reworking of the budgets was not completed prior to Administration. 185 On 8 December 1998, Rothschild sent a further facsimile to ARL. 186 That facsimile dealt solely with the effect of the current copper price on Selwyn. It attached a cashflow analysis showing that a current metal prices Selwyn was losing cash at the rate of approximately $500,000/month. 187 This was a matter of concern to the directors. 188 On 23 December 1998, Mr Ryan and Ms Anderson met with representatives of Rothschild. Mr Ryan's note of the meeting indicates that at that meeting:

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ii. the $3.5 million Arimco facility at $500,000 per month from 31 July 1999, or if, the review outcome was unfavourable and (as would seem likely in these circumstances) Rothschild cancelled the extended expiry date, from the end of January 1999: see Dorfan at 11.4. 192 ARL would not have been able to make these repayments. If repayment was required by Rothschild, ARL would have had little choice but to enter into liquidation. 193 The Rothschild review was to have been completed by 31 December 1998 but was dependent upon provision of requested information by ARL including "more detailed information on the proposed underground mine at Cockburn Deeps" and a completed feasibility study for Cockburn Deeps. As at 31 December 1998 the Rothschild review was incomplete. ARL had not provided the life of mine budgets requested in the 9 November 1998 facsimile or completed a feasibility study and Rothschild had not made any decision save for a temporary deferment of the requirement to collateralise the Guarantee Facility to the extent of $250,000 by 31 December 1998. 194 Rothschild had an unfettered discretion whether or not to extend the facilities. ARL's ability to continue as a going concern was largely dependent on Rothschild extending the facilities. ARL had no legal or moral right to an extension. 195 Rothschild had repeatedly stated that the life of mines was a major matter of concern to it. This was a key focus of the review and had been queried by Rothschild in the past. Rothschild said, and did, nothing to resile from this position, or to indicate that the outcome of the review would be favourable. As Mr Swan conceded, ARL had received from Rothschild two communications (the facsimiles of 9 November and 8 December 1998) which were negative so far as ARL's position was concerned and ARL had not received any countervailing indications from Rothschild. 196 ARL was not able to prepare life of mine budgets which could reasonably be expected to satisfy Rothschild because it did not have the reserves or the resources readily convertible to reserves with which to do that. As to the former, Rothschild's facsimile of 9 November 1998 showed its dissatisfaction with the level of existing reserves at all the mines. 197 Nor was ARL in a position to provide a completed feasibility study for Cockburn Deeps which would satisfy Rothschild, as further work was required as stated in the draft feasibility study, and the project had been recognised to be uneconomic, and suspended. 198 The proposed alternative of a Stage 3 cutback to the Cockburn pit was unlikely to satisfy Rothschild on the review, given the technical difficulties identified by Rothschild in its 9 November 1998 facsimile and its "low confidence" in a further cutback. 199 ARL was not in a position to increase its reserves by "proving up" resources to reserves. To do so would require demonstration that there were "resources" which could be economically extracted, and to do so significant upfront expenditure was required (see earlier as to Cockburn Deeps and Cockburn Pit Stage 3) which ARL was not in a position to fund. 200 The evidence of the asserted "historical conversion rate" of resources to reserves put forward in the affidavits of Messrs Roberts and Swan as the basis on which they wished to "set [Rothschild] straight" was shown in cross examination of them and Mr Goldner to be founded on false bases. 201 All of this put ARL in a very precarious position, a position directly relevant to its financial position and operations during the period of the proposed policy. 202 The directors' evidence called by the liquidator demonstrates that the directors were aware of all these matters. 203 Given the negative views expressed by Rothschild to ARL during its review and the lack of any basis for a rebuttal by ARL, the probability was that the review would have an unfavourable outcome, with the attendant catastrophic consequences for ARL. 204 At the very least, it is common ground that Rothschild and ARL were in disagreement about fundamental matters concerning ARL's mines, future planning (notably the Stage 3 cutback) and life of mines, including the significance of resources to the evaluation of the life of the mines. They disagreed at a time when a favourable exercise of Rothschild's discretion was critical to the survival of ARL over the next 6-12 months. 205 The fact that ARL was talking to Rothschild about whether Rothschild would, in its discretion, extend the term of the debts was a material consideration for someone assessing the financial position of ARL. 206 It is fair to observe that in final address Mr Davies spent considerable time in seeking to make good the proposition that the directors had every reason to be optimistic and confident that they would satisfactorily resolve any issues which they apparently had with Rothschild as a result of the November and December facsimiles. He took the Court through many documents emanating as far back as September 1997, showing a Rothschilds Credit Committee proposal inter alia including the following:

[272]

"Australian Resources reported an operating loss for the six month period" - that is to December 97 - "of $0.68 million, $12.2 million for the full year 97, and a net loss after tax of $2.4 million, including the $9.6 million writedown. Revenue of $62.5 million for the six months was down significantly from previous years. All covenant ratios other than the current ratio are currently being met. These financials reflect the short-term cash flow problems that Australian Resources is currently facing and underlines the need for Australian Resources to renegotiate the terms of ARL's facilities." 209 Mr Davies' proposition was that, although ARL had gone through a very difficult period at the end of 1997, Rothschild was fully cognizant of the then situation and nonetheless prepared to back ARL again. 210 Mr Davies essential contention was that CGU's case in these proceedings simply failed to do justice to the very firm historical support given by Rothschilds to the ARL group. 211 The problem for the liquidator's case in this regard inheres in the context: leaving aside the problems of comparison as between particular chronological periods of difficulties which the group may have had [and in respect of which it may one way or another have been able to successfully reach an appropriate accommodation with Rothschild], the focus of the Court's investigation presently is as to what was and was not at the material time, a material consideration for an insurer assessing the financial position of ARL. The evidence establishes that late December 1998 represented a period of time when the Group's very survival was clearly something which could not be taken for granted. These were plainly matters known to the directors which a reasonable person in the circumstances would have known to be matters relevant to the decision of the insurer whether to accept the risk and if so on what terms. Not even the historically demonstrated anterior support given to the Group by Rothschilds could gainsay this proposition. The Leighton claim 212 Finally the directors were aware in December 1998 that there was also outstanding a claim for $15 million. 213 The liquidator sought to argue that this claim was not seen as a matter of high significance by the directors, as it was perceived as an ambit claim. Nonetheless, the evidence established that ARL was taking the claim seriously, and that:

[281]

iv. Mr Davies then contended that this made a significant difference to the totals in exhibit D11 and a significant difference to the percentages that are calculated for Cockburn Deeps. 221 In final address Mr Macfarlan dealt with this issue making clear that there had been two purposes in terms of his cross examination concerning Exhibit D11. The first was to show that the two mines that had brought about the significant and 'record' gold production in the latter part of 1998 were going to run out in early 1999. They were the Cockburn pit total figure, the first one, and then also the later stage 2. They were petering out in February, March. That point was unaffected by Mr Davies submission. 222 The other point of the document was to demonstrate that the Cockburn Deeps project, which was abandoned or at least suspended, was a very significant budgeted contributor. Mr Davies was correct in that Mr Macfarlan did miss a line out when dealing with Lotus South laterite. 223 Mr Macfarlan submitted that this had not made a significant difference because otherwise Mr Davies would have clarified the position apropos the particular line entry. 224 Mr Macfarlan then furnished the court with a document in which CGU had redone the calculation taking into account the matter raised by Mr Davies. This document entitled "Revised Exhibit D 11 McClure budgeted production became MFI D13. 225 As is apparent what has changed is the line relating to Lotus South laterite where CGU had amended the figures to take into account the additional figures that Mr Macfarlan had overlooked in preparing that calculation. What was important was that the bottom line [the percentage of Cockburn Deeps] did not change in a relatively significant fashion. What is still shown is that, going into the third quarter of the financial year, the Cockburn Deeps project was to be well over 50 per cent, and for the whole of the half-year it was to be close to or approaching 45 percent. Hence it did not indicate that the Cockburn Deeps project, which was abandoned or at least suspended, had been otherwise than a very significant budgeted contributor. Section 28 Would CGU have acted differently if the matters had been disclosed? 226 To the extent that the directors failed to comply with their obligation to disclose matters which they or a reasonable person knew to be relevant,, section 28 of the Insurance Contracts Act operates to reduce the liability of CGU so as to put it in the position which it would have been in had the directors complied with their obligations of disclosure. 227 Section 28 provides that:

[286]

iv. the fact of the Leighton claim. 230 CGU contended that if any of the above factors had been fully disclosed, the insurance policy would only have been issued with an insolvency exclusion in standard terms. This exclusion would have protected CGU from any liability for insolvent trading, and therefore would reduce its liability under the present suit to zero. In contrast, the liquidator contended that CGU would not have imposed an insolvency exclusion. At worst, the liquidator contends that CGU would have imposed a specific exclusion excluding liability for damage arising out of the Leighton claim. This kind of exclusion would have no impact on CGU's present liability, as none of the damages claimed by the liquidator arise out of the Leighton proceedings. 231 As already indicated, the evidence marshalled by CGU on this point consisted primarily of the evidence Ms Cuthbert and Mr Acance, who were the underwriters involved in the Arimco application for renewal. 232 Ms Cuthbert was the underwriter who performed the initial assessment of the Arimco application. It is common ground that Ms Cuthbert, as a junior employee, did not have authority to underwrite the policy with which these proceedings concerned [her underwriting authority at the material time was $10,000,000]. For that reason she consulted with Mr Acance, a more senior officer, who determined to commit CGU to renew the policy. 233 Both Ms Cuthbert and Mr Acance were closely questioned about the steps they took in reviewing the Arimco application for renewal. Of course, the application in question was one renewal amongst many, and was dealt with almost 10 years ago. In Mr Acance's case, he was unable to recall almost any specific events surrounding this particular application, and was only able to give evidence as to the general approach which he believes he would have taken to an application of this type. Similarly, the Court takes into account the difficulty involved in giving evidence as to what one hypothetically would have done if certain information had been disclosed at a particular point in time. It will always be difficult for a witness to ignore those facts which are known through the benefit of hindsight. In the current case, it was undoubtedly difficult for the witness to put out of his or her mind the knowledge that the company the subject of the renewal application was insolvent mere months after the application was made. 234 Because of the key nature of the evidence of each of these two witnesses, and the need to approach such evidence with special care, the affidavit and oral evidence of Ms Cuthbert and Mr Acance is explored in some detail below.

[287]

Evidence given by Mrs Cuthbert 235 The evidence given by Mrs Cuthbert was that at CGU it was her practice, when she had concerns about a company's financial position, to either decline to quote or to quote with an insolvency exclusion clause. 236 Mrs Cuthbert gave detailed evidence as to the materials which she had been given at the time and as to the manner in which she interpreted those materials. She gave evidence that, in assessing the proposal, she would have relied upon the information contained within the proposal form (including the negative answer to question 10) and would have carefully studied the attached Annual Report. 237 Having read the Annual Report, Ms Cuthbert made a note of some of the significant information using a computer program described as 'Insure 90' [also referred to by the parties as 'the blackboard']. While the actual underwriting file could apparently not now be located despite various extensive searches and inquiries, this computer datasheet, which was accessed by both Ms Cuthbert and Mr Acance, was annexed to the affidavits. This spreadsheet automatically generated certain totals and ratios and was one of the tools that the underwriter would use to assess the risk. 238 The spreadsheet shows that Ms Cuthbert made a note of various financial data obtained from the Annual Report, such as the current ratio, liquidity ratio, liability to net worth ratio and borrowings to net worth ratio. She concluded on the basis of the information available to her that "(t)he ratios and other figures looked much the same as the previous year and the profitability had improved." Overall she concluded that "it all looked positive." 239 As evidenced from the spreadsheet, it appears that Ms Cuthbert made an error in explaining that a reduction in the liquidity ratio was due to a change in accounting practices. In fact, the change in accounting did not explain the fall in the liquidity ratio, which was due instead to a fall in cash and receivables. Ms Cuthbert was unable to say whether, if she had realised her error in December 1998, she would have been prompted to investigate further the company's financial situation. Mr Acance's evidence on this issue was that, if he had been aware of the mistake, it would not have made any difference to the way he dealt with the underwriting of the risk. 240 The liquidator also highlighted various other information contained within the Annual Report which he claimed refuted Ms Cuthbert's conclusion that 'it all looked positive'. These factors, which were not noted on the blackboard, included the following:

[299]

(g) They may also have discussed any possible Mergers & Acquisitions with interested parties like the Gutnick (Great Central Mining) Group. 248 Mrs Cuthbert's notes on the spreadsheet say: "Gold production for year was 207,241 ounces. Gold production for 98-99 is projected to rise to 250,000 ounces". This told him that gold production would be increased by about 20% with a healthy margin between production costs and the forward sale prices. 249 The spreadsheet showed the net profit after tax ('NP. a/tx') of $3.585 million. This told him that there had been an improvement in profitability and the Group was trading profitably. Profitability was an important factor when he assessed an insurance risk. 250 The spreadsheet showed net worth of $159.537 million which told him the Group's assets exceeded its current liabilities by a comfortable margin. The current ratio ('Curnt') on the underwriting screen was 1.12 which was acceptable to him. 251 Another item that he considered most important was exploration expenditure and exploration success, because this was needed to extend the life of a mine and generate more revenue in the future. 252 He assumed that he had found out from his discussions with Mrs Cuthbert that Arimco had raised some $11.2 million gross/$10.2 million net, for a rights issue after 30 June 1998. The likelihood that he had asked a question in relation to that matter or that Mrs Cuthbert had offered that information was high even though the information did not appear on the blackboard. He regarded the fact that the company had raised that money as very significant information for considering whether to underwrite the risk [transcript 352]. 253 Mr Acance's evidence was that there was nothing on the spreadsheet or in what Mrs Cuthbert told him to raise any question or doubt about the ARL Group's ongoing viability or insolvency. Had there been anything of concern he would have called for the underwriting file and looked at the proposal and the Annual Report in detail himself. Had there been any indication that ARL might have financial difficulties or become insolvent during the period of insurance, he would definitely not have approved the renewal on the same terms. He would have offered a renewal with a reduced limit, say $1.0 million, and with an insolvency exclusion in CGU's standard wording in 1998. Assessment of risk 254 Mr Acance gave evidence that:

[323]

[An] important factor in assessing any D&O insurance submission is the moral character of the Board. Because CGU is insuring the directors of the company, their integrity and character is an important consideration. I have been asked to assume that ARL's 'Financial Overview' for February 1999 states under the heading "Cash flow" that " Other than the $5.2 million invested with Rothschild, the remainder of the share rights funds were temporarily 'borrowed' to meet the major payments at the end of January" . I have been informed that the rights issue funds were raised following the issue of a Prospectus by ARL which stated that the funds to be raised would be used for exploration purposes. If the rights issue funds were used for other purposes, or there was a prospect that they would be used for other purposes, that would have been an important factor in my mind when considering this submission. In combination with other information, it would have made me offer renewal terms with an insolvency exclusion and a lower limit of cover. Rothschild review 276 Ms Cuthbert's evidence was that she would have recommended an insolvency exclusion based on the letter from Spencer of 9 November 1998 and also in respect of the Spencer letter of 8 December 1998. In her oral evidence she said that if she had seen the letter she would have needed to get assistance from Mr Acance as she did not have any understanding about what life of mines budgets were and did not understand what was meant by life of mines generally. She agreed that if she had been told that the company was in the process of preparing further line of mines budgets and that Rothschild was content with that she would have felt comfortable with it. 277 Ultimately, Ms Cuthbert agreed that if she had known that Rothschild had agreed in December 1998 to extend the time for payment of $250,000, and extend time to permit the Group to have into the New Year to prepare its further forecasts she would have had comfort that Rothschild was providing support for the company. 278 Mr Acance regarded the relationship between a company and its financiers as highly relevant when assessing risk. Had he been aware that ARL was in disagreement with Rothschild on matters that had the potential to affect its future financing arrangements, he would have seen that as a major risk and would certainly have offered renewal only with an insolvency exclusion. 279 Mr Acance was closely questioned on this issue, and a number of matters were put to him which he admitted would have provided 'some comfort' in relation to the relationship between ARL and Rothschild [for example the sale of the Convertible Notes]. Nonetheless, he ultimately did not resile from his position that, had full disclosure been made regarding the Rothschild situation, he would not have renewed the policy without an insolvency exclusion. An assessment of the evidence 280 On this issue, the Court is required to perform the difficult task of assessing on the balance of probabilities what is really a hypothetical question: What would CGU have done had the various relevant matters been disclosed? This involves effectively making a decision as to which were or were not factors which would have caused CGU to take a particular approach. 281 In almost whatever way one approaches the matter there are difficulties posed for the Court by the way in which the parties elected, for forensic reasons, to present their cases. These difficulties concern the evidence given by Mr Acance in particular, but also the evidence given by Ms Cuthbert. Both parties were from time to time able to draw comfort from particular answers given by these two witnesses. There was certainly a plethora of material to permit either senior counsel to move around between the sundry factors which had been put to these witnesses as assumptions, and sometimes, as assumptions to be made in conjunction with the making of other assumptions. The Court's task is made more difficult by the way in which each witness was asked to comment on a large number of overlapping but at times divergent assumptions, not all of which were ultimately central to the defendant's case. 282 Ultimately the case put by the liquidator was that the evidence of both Mr Acance and Mrs Cuthbert should not be accepted to the extent that their evidence was that if they had known all or some of the factors put to them as assumptions, they would only have issued a renewal of the policy with the insolvency exclusion. The liquidator's case took into account particular approaches shown to have been taken in a number of underwriting files where no insolvency exclusion had been insisted upon. Further the liquidator's case heavily rested upon the proposition that it was not possible for Mr Acance nor Mrs Cuthbert to put out of their minds the matters which they came to know subsequently and could not have known at the time. The liquidator's case was that the matters which had been identified by Mr Acance and Mrs Cuthbert as 'concerns about Arimco', were in fact not matters with which they were at all concerned based upon the approach they took to the material that was supplied to them in December 1998. 283 It has to be said that whilst Mr Acance was not always consistent in the answers which he gave under cross examination, and although he had to correct himself on occasion, by and large he presented as an extremely competent witness with sufficient experience in the discipline which constitutes his expertise to have been able to explain his position quite comfortably throughout the cross examination. Bearing in mind the proper approach to the difficult task of making every effort to avoid reconstruction by use of the benefit of hindsight, and taking into account the many matters which Mr Acance was asked to assume and on which he was asked to base a deal of his evidence, yet still the balance of probabilities favours accepting his evidence as reliable. 284 The Court accepts that certain of the answers given in cross examination of Mr Acance favoured the liquidator's case. But the cross examiner's questions in relation to those answers were extremely carefully elicited, again with an eye to quarantining one or other particular area for close consideration. Nonetheless, the difficulty for the liquidator is that there remained many significant areas where Mr Acance could not be shaken from his evidence that, had particular matters been disclosed, he would not have issued the policy without an insolvency exclusion. These areas include the Rothschild review and the use of rights issue funds to pay general creditors. 285 Under cross examination Mr Acance was challenged in relation to the evidence that he had given that had there been any indication that Arimco might have financial difficulties or become insolvent during the period of the insurance, he definitely would not have approved the renewal on the same terms but would have offered the insolvency exclusion. It was put to him that he would not have offered the insolvency exclusion merely if he had perceived that Arimco might have financial difficulties in the Policy year. His answer was that this was incorrect [transcript 358]. 286 Although Ms Cuthbert obviously had problems in recalling the detail of a number of the events of the time, I formed the view that she was careful in her endeavours to acknowledge where she was unsure and generally gave reliable evidence. 287 Even though one remains in the world of speculation and reconstruction, the balance of probabilities heavily favours the Court's finding that these answers are reliable. The real problem with the liquidator's case inheres in the strength of the evidence that material matters were not disclosed and [notwithstanding some success in cross examination, of Mr Acance in particular] its inability to successfully challenge his central tenet [stemming from his sharp eye for accurate answers to question 10 of the proposal] that he would have treated the application quite differently had a positive answer been given to this question. In short, the disclosure to him of the sundry indicators [set out in these reasons] that Arimco was in a precarious financial position, and might have financial difficulties or become insolvent during the period of the insurance would have resulted in his not having approved the renewal without an insolvency exclusion. The Leighton claim 288 The one exception to the general acceptance of Mr Acance's evidence is with respect to the Leighton claim. 289 Ms Cuthbert's evidence in respect to the Leighton claim was that, if she had been made aware of the claim she would have raised it with Mr Acance and asked for further information. When further details surrounding the claim were put to her on cross examination, she admitted that it was possible that the policy would have been issued with a specific exclusion for the Leighton claim, and without an insolvency exclusion. She maintained, however, that she would have raised the matter with Mr Acance and been guided by him. 290 Mr Acance gave evidence that if he had been aware of claim by Leighton against the company then [even if no other relevant matters had been disclosed] he would only have agreed to approve the renewal with an insolvency exclusion. His evidence was that he regarded this claim as a major risk, as he knew Leighton by reputation as a strong litigator that would not back away from litigation. 291 The finding is that, on this issue, Mr Acance's evidence was contradicted by relevant documentary evidence. Specifically, Mr Acance was taken on cross examination to a document described as 'Underwriting File 7'. This file concerned an application for insurance approved by Mr Acance in which the company seeking insurance had disclosed that they were facing a claim against them for NZ $60.5 million, which exceeded their shareholders equity of $47.4 million. The file demonstrates that in this case, Mr Acance expressly considered imposing an insolvency exclusion, but rejected this in favour of a specific exclusion of the claim. 292 Mr Acance's explanations for the approach in Underwriting File 7 was that the reason for this specific exclusion was that there would not be an aggregation of the claim from one year to the next, that the insured had $39 million sitting in the bank, and that if there was any insolvent trading claim it would only extend over a very short period on the basis that if they lost the claim they would have to pay the money immediately. 293 But the better evidence is the blackboard note made by the underwriter on the underwriting file after discussing the notified claim with Mr Acance - to the effect that the standard specific exclusion used by CGU would protect it in the circumstances. The terms of that standard exclusion were certainly wide enough to cover any indirect claims arising from the insolvency caused by the notified claim. Whether that was correct or not, the evidence is that that is what CGU believed was the case and that application of the specific exclusion was its practice as demonstrated by the evidence of the underwriting file.

[353]

"Reasonable" in this context imports the standard of reasonableness appropriate to a director of reasonable competence and diligence, seeking properly to perform his duties as imposed by law (when viewed as a whole) and capable of reaching a reasonably informed opinion as to a company's financial capacity. In other words, facts and matters must be shown to exist which would give grounds for a director acting in accordance with that standard to suspect insolvency. 312 For the purposes of section 588G(2)(a) the plaintiff must prove that the directors were aware of certain matters and facts giving rise not to an actual suspicion of insolvency but which constituted reasonable grounds for such a suspicion: Plymin at [426]. Statements by the directors as to whether and when they actually formed a suspicion are therefore irrelevant. 313 For the purposes of section 588G(2)(b) it is sufficient that a reasonable person in a like position to the particular director in the company, in the company's circumstances, would be aware of the facts and matters constituting reasonable grounds for suspecting insolvency, and it does not matter that the director was not actually aware of the of those facts and matters. Sub-section 588(2)(b) applies to cases where the directors did not know of the relevant facts and matters because they had failed to ascertain them, but a reasonable person in a like position would or ought to have ascertained those facts and matters: Plymin at [426]. 314 Section 95A of the Corporations Law defines insolvency as inability to pay all the person's debts as and when they become due and payable. Suspicion of insolvency therefore depends on the view a reasonable director would take, not just of the balance sheet, but of the existing debts, the time when they are all due to be paid and the company's present and expected cash resources (see Ford, Principles of Corporations Law, 13th ed (2007) at [20.100]). 315 The type of suspicion required to be found for the purposes of section 588G(2) is more than a mere wondering as to insolvency; it requires a view or a mistrust of appearances as to ability to pay debts to be formed, even if the evidence is insufficient to warrant a positive belief: ASIC v Plymin at [427]. Belief in insolvency on the balance of probabilities is not the test. The preconditions for liability 316 The preconditions for liability set out in section 588G(1) were established by the evidence. The relevant defendant directors remained directors of Arimco throughout the period when the debts relied on by the plaintiff were incurred, save for Mr Ryan who resigned as a director on 4 March 1999 and Mr Roberts and Mr Smith who became directors of Arimco on that date. 317 CGU has admitted that Messrs Roberts and Smith, in their capacity as directors of ARL throughout the relevant period, acted as directors of Arimco as well due to the control ARL exercised over the management of Arimco. CGU has also admitted that Ms Anderson, though not an appointed director, was a "director" in the extended meaning of that term under the law. 318 The directors were aware of the following matters during January 1999 or at least by the time of the Board meeting held on 3 and 4 February 1999 or shortly thereafter:

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