Issue 7: reliance
The operational structure of Atradius
192To understand the parties' submissions on this issue, it is necessary to know a little about the way that Atradius carried on its business.
193Atradius seems to have its base in the United Kingdom, with offices in London and Cardiff. It operates in more than 40 countries worldwide. Mr Mark Magee, who is the senior manager of Atradius' special products analysis's team, said that Atradius writes approximately 30% of all trade credit insurance policies written globally.
194Because the business of Atradius is insuring credit liabilities, its underwriting processes involve two separate strands. One, referred to as credit underwriting, involves an assessment of the risk against which insurance is sought. As I have noted already, those risks may be "whole of account insurance" or "single buyer insurance" or something in between. For example, a company may wish to ensure its top 5 or top 10 debtors against default.
195Single buyer policies are also known as special products. It is of course of key significance to Atradius to assess the buyer whose obligations are to be the subject of the insurance, so as to form an estimate of the risk.
196The second strand of underwriting is called "policy underwriting". That includes contact with the proponent or broker; assessment of the risk from a commercial (as opposed to a credit) perspective; settling the terms of the policy; reviewing the terms on which the proponent contracts; and settling the premium.
197For single buyer insurance, both credit underwriting and policy underwriting are engaged. In Australia, Atradius employs personnel responsible for credit analysis (for the purpose of credit underwriting), for credit underwriting and for policy underwriting.
198Atradius' regional offices are responsible for analysis of buyers within their jurisdiction. In the present case, because BXP was an Australian (listed) company, the Sydney office of Atradius was responsible for monitoring its financial performance. A "buyer owner" was assigned to monitor the position of BXP, and its performance was monitored by the local credit committee, frequently referred to as the "LCC'. The responsibilities of the LCC including fixing, for each buyer, a review limit (frequently referred to as an RL) specifying the total amount of insurance that could be written, worldwide, to cover the obligations of that buyer.
199As a matter of course, credit underwriters and policy underwriters in regional offices of Atradius were given authority limits. When the subject policy was underwritten, Mr Peter Athaide was the credit underwriter in the special products division in Australia. Mr Athaide could approve policies with a limit of cover for a single buyer of €5m, provided that the RL was not exceeded. Applications for a higher limit of cover required the approval of Mr Magee in Cardiff.
200At the relevant time, Ms Shaw was a policy underwriter in the special products division of Atradius in Australia, and held the position of head of special products for Australia. She reported to Ms Johnson in London, who was director, special products, for Northern Europe and the Asia - Pacific Region.
201Ms Shaw had an approval limit of either $5m or €5m. (The evidence and submissions on this point are not entirely clear, but since the amount for which Optus sought insurance in respect of BXP comfortably exceeded either limit, the point need not be pursued.) Thus, in respect of the subject transaction, Ms Shaw was required to seek the approval of Ms Johnson.
202I mention at this point that there appears to have been some confusion between Ms Shaw and Ms Johnson in relation to the latter's approval. Ms Shaw thought that she had obtained this approval at some stage during the process of communication with Ms Johnson. Ms Johnson did not think that she had given approval at that time. But on any view, the policy was written. And on any view, when Ms Johnson later came to Australia, she either authorised or ratified the policy underwriting decision that Ms Shaw had made. I do not think that anything turns on this.
203Thus, the following points emerge from the evidence (and I shall confine these conclusions to the Sydney office of Atradius):
(1)policy underwriting decisions were made either by or under the supervision of Ms Shaw, up to her approval limit; if that approval limit were exceeded, Ms Shaw would seek and obtain the consent of Ms Johnson up to her approval limit.
(2)RLs for particular buyers were set by the LCC, and reviewed from time to time on the basis on information and analysis provided by the buyer owner.
(3)Credit underwriting approvals, within the overall RL, were made by Mr Athaide up to his approval limit; if that limit were exceeded, Mr Athaide would seek and obtain the approval of Mr Magee up to his approval limit.
(4)A single buyer policy would not be issued unless both policy and credit underwriting approvals were in place.
204Some of the submissions for Optus appeared to conflate the differing processes within Atradius. However, in my view, the evidence shows that the distinctions between policy and credit underwriting, and between the limit-setting function of the LCC and the approval function of the credit underwriter or Mr Magee, were significant, and were observed in the day to day operations of Atradius.
The significance of payment plans
205I propose to move straight to, and to deal in detail only with, this topic. The issues that were argued, on the question of reliance, went far beyond payment plans. However, the evidence of the detailed reviews carried out by the buyer owner, Mr Choo, and by the members of the LCC, satisfies me that Atradius, through those officers, was well aware of the true state of affairs in relation to the BXP's payment history.
206Further, it is clear that Mr Choo received and analysed not only the statutory annual and semi-annual accounts of BXP, but also had access to its quarterly management accounts for the three months ended 30 March 2007. Those management accounts provided further corroboration (if it were needed) of the comprehensive inability (or unwillingness) of BXP to pay its trade creditors within the agreed trading terms.
207Mr Choo and the LCC were either aware, or on that material must have been aware had they turned their minds to the question, that BXP was effectively using its trade creditors to fund its expansion. Mr Magee, when cross-examined on the relevant material, accepted that this was plain.
208Finally, Mr Magee accepted, on the basis of the relevant material, that BXP had a significant "working capital hole": a shortage of working capital to fund its operational needs and expansion. Again, if Mr Choo and the LCC were not actually aware of this, there is no doubt that they would have become aware had they turned their minds to the question.
209Thus, for this issue as for the previous issue, the real point is in relation to the non-disclosure of payment plans.
The evidence of Ms Shaw
210I start with the evidence of Ms Shaw, because it was she who reviewed the proposal before the policy incepted. In my view, Ms Shaw was a witness who sought to the best of her ability to give truthful and accurate evidence. However, as she acknowledged, she was giving her evidence based not on any actual recollection of the detail but on reconstruction, based in turn partly on relevant documents that had been shown to her and partly from her recollection of her usual business practices at the time. (Ms Shaw has since left the employ of Atradius, and is employed in a senior position with an Australian bank.)
211I do not think that it matters a great deal that Ms Shaw was giving evidence based on reconstruction. There are two questions on which her evidence is of key importance. The first is whether in fact she read the proposal form, including specifically the answer in relation to payment plans. I am satisfied that Ms Shaw did in fact read it. She impressed me as a careful and conscientious person. I do not accept that she would have given the final "tick" to a substantial risk (a policy limit of $30m) without reading the proposal form, as undoubtedly her usual practice would have required.
212The second question of key significance to which Ms Shaw's evidence is relevant is: what would have happened had the truth, in relation to payment plans, been disclosed? Ms Shaw said, in substance, that if the true position had been disclosed, she would have concluded that there was a real risk that, in the future, BXP might not be able to meet its payment obligations, and that she would have reviewed her recommendation to Ms Johnson that policy underwriting approval should be given.
213In this hypothetical situation - what would have happened if the truth had been revealed? - it is clear that Ms Shaw's evidence can only be hypothetical. In this section of her evidence, she is not dealing with events that happened; and thus, whatever limitations apply, respect of past events, to evidence based on reconstruction is not relevant.
214One of the attacks made on Ms Shaw's evidence was based on the fact that she spent only a brief time - less than half an hour - reviewing the proposal and material submitted with it. That material included at least a copy of the sub-agency agreement. However, in relation to the proposal form, Ms Shaw made the point that (obviously enough) she was thoroughly familiar with the questions asked. She said, further, that the review was a matter of looking for irregularities or inconsistencies (T131.40-.46). Although that answer was given in relation to trading experience and payment patterns, it does in my view give a clue as to the way in which Ms Shaw approached her task. She was looking, not so much to ensure that the material was consistent with what she knew; but, rather, to see if anything stood up to her as being inconsistent; or if an answer were a "red flag".
215In this context, Ms Shaw said that payment plans were conceptually far more serious than payment delays. She said (T138.7-.19):
... payment plans are pretty serious. Trading experience and payment delays, you know, are your first layer of concern, but formal changing of payment plans to meet age of debt and continued a supply is a far more serious matter.
216I accept that evidence. To my mind, it accords with common sense and the probabilities.
217Ms Shaw was unable to point to any specific prior experience with disclosure of payment plans, or to any underwriting direction concerning that topic. Nonetheless, I am satisfied that she had an understanding of what was involved; and that as she said, in the passage that I have just quoted, she understood that payment plans were a matter of serious concern.
218I should deal with three specific challenges that were put to Ms Shaw (over and above the point that her evidence was based on reconstruction rather than recollection). The first was, in substance, based on the proposition that her reconstruction was influenced, unconsciously or otherwise, by her knowledge that there had been a very large loss on the policy (see, generally, T137-138). It was put specifically to her that in those circumstances her conduct in allowing the risk to go forward "is something that is, at least, capable of criticism" (T137.39). She rejected this:
There is nothing in the proposal that is inconsistent with the other information that had been provided up to that point.
219I accept that evidence. I should note that it was following, and as part of, this exchange that Ms Shaw gave the evidence that payment plans were far more serious than trading experience.
220It was then put to Ms Shaw that she could not put her hindsight knowledge - that there was a very large claim on a policy that she had recommended for approval - out of mind when giving her evidence. She accepted that this was so (T138.12-.20). Her readiness to accept this confirms my impression of her as a witness who sought to be truthful.
221The second specific challenge was based on the proposition that, matters having gone as far as they did, she would not have changed her recommendation (T143.44-144.11). Ms Shaw said, and I accept, that she had no problem with reversing her recommendation. I set out that passage:
Q. In all the circumstances I have put to you, you are not able to say reliably that you would have changed your position from one of active support of this policy to a recommendation that Atradius should not proceed with the policy?
A. If I receive information that is adverse, whether it is on the proposal, as it was not indicated or, indeed, from some other source, then, yes, I don't have a problem whatsoever in reversing my recommendation to not proceed.
Q. My question was specific. In the light of this risk and the circumstances we have addressed today and your behaviour as I have sought to characterise it with you, you can't reliably say that, in the circumstances of the additional information you identify, you would have recommended to other people within Atradius not to proceed with this policy?
A. I disagree. The information, those five, six points that you made at the outset, ten, fifteen minutes ago, I agree with those conclusions and statements and assumptions in isolation, but when you receive additional information that is contrary to what you have otherwise been told, or received, be it internal or external, then, as it is, you know, sufficiently adverse, then I don't have a problem with reversing my recommendation.
222The third specific challenge was based on the proposition that Atradius was keen to gain the whole, or at least more, of the trade insurance business of Optus. There is no doubt that Ms Shaw and others saw the transaction as strengthening the relationship between Atradius and Optus (see, for example, T89.10-.14). It was put to Ms Shaw, and she agreed as a matter of fact, that the premium proposed to be charged was reduced over time, and that Atradius became aware of the possibility that Optus might take its business to a competitor, Zurich (see, generally, T88-90).
223Thus, Ms Shaw accepted that she was keen to write the policy, and to expand the relationship between Atradius and Optus (see T140.44-141.1).
224Those matters, and others, were relied upon in support of the submission that Ms Shaw could not adhere to the proposition that she would have changed her position from one of support for the policy to a recommendation that it not proceed, had the proposal form accurately answered questions 1 and 3, thus disclosing adverse information. It was in this context that Ms Johnson gave, and repeated, the answers that I have set out at [221] above.
225The submission was put that I should infer, from the evidence to which I have referred, that the decision taken by Atradius would not have altered had the questions been answered correctly. I do not accept that submission. It is inconsistent with the evidence of Ms Shaw, which I accept. It is also inconsistent with the evidence of Ms Johnson and Mr Magee, to which I turn to in a moment.
226I conclude, based on my overall acceptance of Ms Shaw's evidence that:
(1)had the proposal form made the disclosures that should have been made (for the form to be accurate and truthful) in relation to payment plans, Ms Shaw would have noticed them; and
(2)in those circumstances, Ms Shaw would not have signed off on the issue of a policy, but would have contacted Ms Johnson to see if the information that, hypothetically, had been disclosed made any difference to the policy underwriting approval that had been given.
227Thus, I conclude, the non-disclosure was material at least in relation to Ms Shaw, and that to the extent that Ms Shaw was responsible for the issue of the policy, she would not have permitted the policy to be issued without seeking the approval of her superiors.
The evidence of Ms Johnson
228Ms Johnson said, in effect, that if the correct answers had been given in relation to payment plans, and if (as I find would have happened had that been done) Ms Shaw had referred to her the question of whether the policy should proceed, she would have declined to approve the policy. Ms Johnson gave the following reasons in support of that position (statement dated 2 November 2010, para 11):
11.The reason that I would have declined to approve the Policy is because it is my view that in a debtor/creditor situation such as that described in Jo Shaw's email to me on 17 July 2007 (at tab 1), I cannot imagine any justification for the payment plan or plans which would make the risk one I would be prepared to underwrite. Based on my understanding that the role of Bill Express was to collect and forward payments to Optus after the cards were reconciled on a monthly basis, then the existence of a payment plan indicated that Bill Express was using money collected on behalf of Optus to meet other debts or for other unknown purposes. This should, however, have been a cash-positive business. Furthermore, Optus was a critical and constant supplier who should have been able to command adherence to its payment terms. For these reasons, I would have formed the view that Bill Express was unacceptable credit risk and that the credit relationship with Optus had not been in full control considering the nature of the trade. I would have considered that the buyer's requirement for payment plans took place in a business context which simply failed to justify this. I would also have considered the repayment plans to be an alarming indication of the buyer's financial status as well as an indication of a less than rigorous credit management by the potential insured. Either of these factors alone would have made the risk fundamentally not underwritable.
229There were some difficulties in relation to Ms Johnson as a witness. In general terms, it seemed to me that she was from time to time willing to overstate matters, in a way favourable to Atradius, only to be compelled, in the course of testing, to resile to some extent. Again, there were passages in her evidence where, to my mind (both listening to her as she gave evidence and on reading the transcript later), she would not make concessions that should properly have been made.
230Nonetheless, I accept the central thrust of her evidence: that if there had been proper disclosure in relation to payment plans, she would not have accepted the risk. I say that because it seems to me to accord with common sense. Further, I do not regard the difficulties with Ms Johnson as a witness as justifying the wholesale rejection of her evidence, and I observe that the difficulties do not seem to me to impeach this central aspect of her testimony.
231Finally, in this context, to the extent that the challenge was based on the proposition that the relevant material was either known or knowable to Mr Choo and the LCC (see, for example, T208-209), that does not seem to me to have a great deal of relevance to Ms Johnson's own views, nor to her evidence as to how she would have reacted if a truthful answer had been given, and relayed to her, in relation to payment plans.
232Thus, I accept this aspect of Ms Johnson's evidence, and conclude based on it that had the correct position in relation to payment plans been disclosed, she would have either revoked or in effect suspended the policy underwriting approval that she thought that she had been given. Putting the matter in terms of Ms Shaw's evidence, I am satisfied if a correct answer had been given in relation to payment plans:
(1)as I have said, Ms Shaw would have noticed this and referred it to Ms Johnson; and
(2)upon that referral, Ms Johnson would have made sure that the policy did not issue at least until the matter had been more thoroughly been investigated.
233The second conclusion draws attention to the fact that, as the evidence ultimately demonstrated, final responsibility for a decision would have rested with Mr Magee. That is because the information that should have been (but was not) disclosed was relevant to the credit underwriting process in particular, and Mr Magee was for present purposes the senior person, having the relevant authority to approve (or to withhold approval).
The evidence of Mr Magee
234The third witness called who gave evidence on this point was Mr Magee. Mr Magee said, in substance, that if the relevant material had been put to him (being the documents that show the negotiation and existence of the payment plans) he would not have underwritten the policy unless satisfied as to certain matters (see his statement dated 2 November 2010, paras 42 to 47). I note that, in paragraphs 47 of his statement, Mr Magee said (as Ms Shaw had said in her oral evidence) that he regarded payment plans as a serious matter.
235I set out para 45 of Mr Magee's statement (which sets out the conclusions he would have reached based on a review of the documents evidencing the payment plans) and paras 46 and 47 (which set out his evidence as to his reaction to those conclusions and the reasons for it):
45.If I had reviewed this information prior to the time the Policy was issued I would have concluded that:
(a)Prepaid had entered into a number of payment plans with Bill Express;
(b)Prepaid was in contact with Bill Express about Bill Express' inability to pay its debts on time; and
(c)Bill Express' payment problems were ongoing.
46.If, prior to the time the Policy was issued, I was informed that Prepaid had entered into payment plans, I would not have underwritten the Policy unless I was absolutely satisfied that:
(a)there were reasons to explain why Prepaid had put Bill Express on payment plans that were unconnected with the financial position or Bill Express; or
(b)the issue which caused Prepaid to enter into the payment plans with Bill Express had been finally resolved and were very unlikely to recur; and
(c)the customer had improved their internal credit control procedures to spot potential payment problems as early as possible so that these could be dealt with in the most effective way possible.
47.The reasons that I would not have underwritten the Policy are otherwise the same as those I have set out in paragraph 40 above, the only difference being that I regard entering into payment plans as even stronger evidence of a high insolvency risk or future problems, because there is rarely any explanation for a payment plan other than that the buyer does not have the financial resources to pay its debts on time.
236I accept this aspect of Mr Magee's evidence. Indeed, I accept Mr Magee as a witness who, in general, sought to give truthful and accurate evidence. I do so notwithstanding that, as Mr Gleeson pointed out in submissions, that there were aspects of his evidence where he overstated matters and then had to resile to a certain extent. I do not regard those matters as impairing Mr Magee's credibility. On the contrary, I regard his willingness to make concessions, when confronted with a good reason to do so, as supporting my conclusion that he sought to give truthful and actual evidence.
237Further, Mr Magee presented as a careful, competent and experienced senior credit underwriter. I have no doubt that he was thoroughly conversant with the relevant material. I have no doubt that he was aware of the significance of payment plans. I have no doubt, had a correct answer been given in relation to payment plans and had that been conveyed to him (as it should have been), he would have acted as he said, in para 46 of his statement dated 2 November 2010, he would do.
238In this context, I do not accept that Mr Magee's position or function was of some secondary or minor kind. On the contrary, he was the senior person in the credit approval stream of the special products division, just as Ms Johnson was the senior person in the policy underwriting stream. (In each case, of course, there were limits of authority, and higher authorities residing elsewhere; but the particular proposal did not invoke the need to go beyond Mr Magee and Ms Johnson.) In the ordinary way, material relevant to credit underwriting approval should have gone to Mr Magee. Had it done so (and I am satisfied that a correct answer, disclosing the existence of the payment plans, would have done so), then his central significance becomes clear.
Conclusion
239I accept that Atradius was keen to gain the business of Optus, or at the very least to improve its business relationship with Optus. I accept that relevant officers within Atradius saw the subject policy as a means to gaining more business, and improving the relationship. But I do not accept that Atradius would have entered into a policy, with a substantial (if not very high) risk of a loss up to $30 million, simply to gain more business in the future. As Mr Newlinds pointed out in submissions, it would take many years of claim-free trading to make good a loss of that magnitude.
240In all the circumstances, I am satisfied, and conclude, that if correct answers had been given in relation to the question asking for details of payment plans, Atradius would not have issued the policy when it did. I conclude further that in this respect Atradius did rely on the answers that were in fact given, in deciding to issue the policy.
241Issue 7 should be answered accordingly.
242What might have happened, if the correct answers had been given, is a matter of speculation. I incline to the view that, as Mr Magee said, a policy might have been issued (on unspecified terms and at an unspecified premium rate) had there been given an explanation, satisfactory to Mr Magee, of the payment plan issue. But since the evidence and submissions did not cover that point, it is unnecessary to go further.