HEARD : 2 MARCH, 21 SEPTEMBER, 21 OCTOBER & 2 DECEMBER 2005

BETWEEN : THE BELL GROUP LTD (In Liquidation) (ACN 008 666 993)

Practice and procedure - Pleadings - Defendants' argument that cl 17.12 of refinancing agreements not an impediment to commercial solvency - Argument that avoiding disclosure to LDTC not part of equitable fraud claim - Whether adequately pleaded - Turns on own facts

First Plaintiff : Mr R M Robson QC, Mr J W S Peters SC & Mr D Crennan

Second to Thirteenth Plaintiffs : Mr R M Robson QC, Mr J W S Peters SC & Mr D Crennan

First Defendant : Mr T M Jucovic QC & Mr D E J Ryan SC

Second to Fifth Defendants : Mr T M Jucovic QC & Mr D E J Ryan SC

Second to Thirteenth Plaintiffs : Blake Dawson Waldron

First Plaintiff by Counterclaim : Mr T M Jucovic QC & Mr D E J Ryan SC

by Counterclaim : Mr T M Jucovic QC & Mr D E J Ryan SC

First Defendant by Counterclaim : Mr R M Robson QC, Mr J W S Peters SC & Mr D Crennan

by Counterclaim : Mr R M Robson QC, Mr J W S Peters SC & Mr D Crennan

Second and Third Plaintiffs by Counterclaim : Freehills

First Defendant by Counterclaim : Blake Dawson Waldron

Second to Tenth Defendants by Counterclaim : Blake Dawson Waldron

Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337

Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 76 ALJR 436

Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666

Sheahan v Hertz Australia Ltd (1995) 16 ACSR 765

Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213

Taylor v Australian and New Zealand Banking Group Ltd (1988) 13 ACLR 780

The Bell Group Ltd & Ors v Westpac Banking Corporation & Ors (1) [2001] WASC 315

The Bell Group Ltd & Ors v Westpac Banking Corporation & Ors (3) [2004] WASC 93

1 OWEN J: This is a further interlocutory judgment in the Bell Group litigation. These reasons relate to two groups of contentious pleading issues. The first is what is commonly referred to as the cl 17.12 issue. One provision of the financing agreements (cl 17.12) places limitations on the extent to which the companies could have access to the proceeds of sale of assets. The banks say that the limitations were not an impediment to the commercial solvency of the companies. The plaintiffs say that the pleadings do not permit the banks to raise such a case.

2 The second group arises from a document that I have prepared called "the draft judgment structure". That document sets out the headings under which I will deal with issues in the judgment. I distributed it to the parties and gave them the opportunity to comment so as to ensure that all relevant matters had been identified. In that process two contentious matters arose. Both necessitate an interpretation of the pleadings. They are described later in these reasons.

3 The background to the litigation appears from my reasons in The Bell Group Ltd & Ors v Westpac Banking Corporation & Ors (1) [2001] WASC 315 and in The Bell Group Ltd & Ors v Westpac Banking Corporation & Ors (3) [2004] WASC 93.

4 As part of the refinancing arrangements, the banks and the relevant Bell companies, executed on 26 January 1990 the Australian Banks Facilities Agreement ("ABFA") and the Restated Lloyds Facility Agreement No 2 ("RLFA2"). Clause 17.12 is common to ABFA [TBGL.00001.002] and to RLFA2 [TBGL.03635.004]. It requires the proceeds from the sale of assets (subject to exceptions) to be given to the banks as a pre-payment of the facilities. The plaintiffs say this is a critical feature of the arrangement because it meant that the companies were deprived of access to those proceeds to fund current liabilities. The plaintiffs concentrate on the execution of the documents containing that term. This effected a transfer of control from the companies to the banks and the companies were thereafter at the whim of the banks. As senior counsel for the plaintiffs put it [Tra: 20442]:

"We're saying that by signing this document in circumstances where you needed asset sale proceeds to survive and pay your debts - by signing that document you condemned yourself to insolvency."

5 In their opening, Part 77 on the solvency case, [MISD.00003.033] the banks say (par 303) that as at 26 January 1990 the "overwhelming probabilities" were that if the Bell group required the release of asset sales proceeds to service its current liabilities the relevant consent would have been forthcoming. So understood, the banks say (par 307), cl 17.12 was not an impediment to the commercial solvency of the Bell group. The clause provided a mechanism by which the Bell group could have access to asset sale proceeds. Those proceeds are, therefore, properly to be taken into account in assessing solvency.

6 The plaintiffs complain that there is no part of the banks' pleaded case from which an argument of that nature could arise. And to the extent that the banks say they are merely responding to the plaintiffs' case, the plaintiffs say that it evolves from a false premise about their (the plaintiffs') case.

7 In the course of these reasons I will use a number of abbreviations. Most of them will be obvious and I will not define them unless I think there could be confusion.

8 While it may lead to some technical imprecision, in the interests of economy I will not differentiate between the several companies within the Bell group in relation to solvency. Nor will I worry about the distinction between a company being insolvent, nearly insolvent or of doubtful solvency. And I will use the composite phrase "knowledge" without differentiating (as the pleadings do) between knowledge, belief and suspicion.

9 Although this is essentially a pleading point, I think I should start with the provisions of the financing agreements in respect of which the dispute arises. I will then examine those provisions with reference to the various assets that are the subject of dispute in this aspect of the litigation.

10 Clause 17.12 of ABFA and of RLFA2 provided as follows:

"Where any asset is sold, conveyed, transferred or otherwise disposed of by {a relevant Bell group company}, TBGL shall, unless all Banks agree otherwise at the request of TBGL, cause an amount equal to: ---- to be paid to {WPac} promptly upon receipt thereof and {WPac} shall deposit such net proceeds into an interest bearing suspense account or accounts as nominated by {WPac} to be held in the name of {WPac} or its nominee and to be applied together with any accrued interest thereon on the next Recovered Money Distribution Date as a prepayment of the Existing Loans."

11 The part that I have omitted from the recitation of cl 17.12 contains a detailed description of the way in which various disposals are to be treated and how, in relation to those disposals, the amount to be transferred to WPac is to be calculated. And cl 17.12 does not stand alone. Its full force and effect can only be understood when the entirety of cl 17 and many of the definitions and other provisions within the agreement are taken into account. What follows is an attempt to summarise how I see the regime arising from the various provisions.

12 There are provisions in the transaction documents that restrict both the ability of the companies to realise assets and the access the companies would otherwise have had to the proceeds from permitted asset sales.

13 The principal restriction on asset disposals is to be found in cl 17.8(a). In it the companies covenanted not, without the prior written consent of all the banks, to sell, convey, transfer or otherwise dispose of all or any part of their assets except as provided in cl 17.9 (disposals by the group), cl 17.10 (specific disposals) and cl 17.11 (small disposals). But this restriction did not apply to:

• Stock-in-trade sold, conveyed, transferred or otherwise disposed of in the ordinary course of the business;

• moneys received and expended in the ordinary course of business activities;

• any intra-group indebtedness which is transferred as permitted under cl 17.9(a)(iii); and

• any moneys received by any member of the BGUK Group under any comfort letter or any moneys paid by TBGL under any comfort letter. {See cl 17.8(b)}

14 Under ABFA cl 17.9(a)(A)(aa), the companies could dispose of assets to any person with the prior written consent of the Security Agent ("SA") which consent would not be withheld if SA were satisfied the consideration to be paid "is not less than full consideration in money or money's worth determined on a bona fide arm's length basis".

Restrictions on Access to Proceeds of Permitted Asset Sales

15 In relation to permitted asset sales there were two broad categories of restrictions, each of which had a sub-category. The first category was "specific disposals". This included:

• Bell Group Press Pty Ltd ("Bell Press") proceeds; and

16 The second broad category was "non-specific disposals". The two sub-categories encompassed within it were:

• the publishing assets (other than Bell Press); and

17 The transaction documents provided for the Bell Press assets to be disposed of for not less than $25 million without any further consent, or for less than $25 million with the consent of the banks. SA would discharge the mortgage debenture over the assets and receive the proceeds of sale. The net sale proceeds were to be applied in reduction of the indebtedness to the banks. {See ABFA cl 17.10(a)(i)(A), consent to sale, and cl 17.12(a)(ii), application of proceeds.}

18 The shares in Bell Resources Ltd and J N Taylor Holdings Ltd could be sold in whole or in part or (if the facilities agents agreed there was no diminution in market value) converted into other marketable securities. SA would then release any security over the shares and the net proceeds of sale would go to SA to be applied in reduction of the indebtedness to the bank. If there had been a conversion to other marketable securities the seller would have to give a similar security over the new shares. {See ABFA cl 17.10(a)(i)(B), consent to sale, cl 17.10(c), conversion to other marketable securities and cl 17.12(a)(ii), application of proceeds.}

19 Bryanston Insurance Company Ltd was part of the BGUK Group. Negotiations for its sale had been proceeding throughout 1989. By December 1989 there was a sale agreement that provided for an up-front payment of £5 million. This up-front payment was to be paid to SA to be held by SA in a separate interest bearing account with a right for TBGIL to draw from the account to pay certain nominated liabilities (defined as "Anticipated Liabilities") estimated as at the commencement date. Any balance (and any future receipts from the sale agreement) was to be applied in reduction of the indebtedness to the banks. {See ABFA cl 17.10(a)(ii), consent to sale, cl 17.10(e), permitted access to TBGIL to those proceeds and application of the balance.} By way of aside, it seems the whole of the amount in the separate account was eventually utilised by TBGIL to pay the nominated liabilities. The net receipt from the up-front payment was £3.705 million; see [MISP.00033.044]. The schedule of "Anticipated Liabilities" showed nominated expenses of £3.701 million: see [TBGL.03589.031].

20 Unlike the specific disposals the banks did not give consent in advance (that is, in the agreements) to the non-specific sales. There are two subgroups: first, the publishing assets other than Bell Press and, secondly, the remainder of the Bell Group assets. In this latter category were:

• Shares in Group Financial Holdings Pty Ltd ("GFH");

• A payment arising from a contract of sale for shares in ITC Entertainment Holdings Ltd (part of the BGUK group) ("the ITC contract payment").

21 In fact the regime for the two subgroups is the same. They are differentiated because in ABFA cl 17.9(a) the power to dispose of assets (subject to the conditions set out in the agreement) is conferred separately on Bell Publishing Group Pty Ltd (and any member of the BPG group), TBGL and its subsidiaries (other than the BPG group) and BGUK (and any member of the BGUK group).

22 To dispose of these assets the companies had to obtain the approval of SA. SA had to be satisfied that the disposal was at arms length and at market value. SA would release the securities over the assets to be sold and (unlike the specific disposals) was to receive something less than the entire net proceeds of sale. In this instance the company disposing of the assets could keep up to $1 million from an individual transaction or a total of $5 million from a series of transactions in a six month period. The balance of the net proceeds of sale would go to the SA to be applied in reduction of the indebtedness to the banks.

23 I should say something about the Bond group receivables. If a member of a group of companies ("A") lends money to another member of the group ("B") it is an asset of A and a liability of B. If A were to seek recovery of the money from B it may come within the expansive prohibition in cl 17.8 against the sale, conveyance, transfer or other disposal of an asset, I can see an argument that the receivables would be caught by the cl 17.12 regime and would have to be paid to SA unless it came under one of the nominated exceptions. This is because it would be a "disposal" by way of conversion into cash.

24 But that does not appear to be the way in which the parties dealt with the receivables at the time. Take, for example, the moneys owed by BCF to BGF. [MISP.00033.066.001] indicates that as at 1 February 1990 BCF owed BGF $11.473 million. By 1 May 1990 this had been reduced to $4.844 million by a series of transactions. Some of those transactions related to payment of monthly interest to the Lloyds Bank syndicate and others were for purposes unrelated to the banks' facilities. On 4 May 1990 BCF paid $5.883 million which was used to pay the interest due to SGIC on the private bond issue. By 1 June 1990 BGF owed BCF $0.980 million. The loan balance fluctuated thereafter and by 30 April 1991 BCF owed BGF $5.905 million.

25 It is part of the banks' case that there was, as a matter of historical fact, cash support from BCF for the operations of TBGL and that this is relevant to the insolvency case. The plaintiffs' position seems to be that while they do not take issue with that financial analysis they do cavil with the contention that the receipt of moneys in the period February 1990 to May 1990 is relevant to the question whether or not the companies were insolvent as at 26 January 1990. The plaintiffs contend that as at 26 January 1990 the likelihood of repayment of the Bond receivables was so remote that they cannot be taken into account in assessing solvency. But I do not think either party relies on the Bond receivables as part of the cl 17.12 argument.

26 These arrangements were subject to two minor exceptions. One was "small disposals" {ABFA cl 17.11}. TBGL or any of its subsidiaries could dispose of assets at arms length and for full consideration and retain the proceeds provided the total of such proceeds for all disposals by group members in a six month period did not exceed $100,000.

27 The other exception was inter-group indebtedness. This was defined as "any indebtedness for the time being owed by any member of the BGUK Group (which is the beneficiary of a comfort letter) to any creditor which is a member of the Group". In turn, "Group" was defined as TBGL and any of its subsidiaries and so would include both the UK and Australian sub-groups. Intra-group indebtedness could be assigned or transferred within the group with the consent of SA and, if so dealt with, would not be subject to the application of the disposal proceeds conditions in cl 17.12: {See ABFA cl 17.9(a)(iii)(B) and cl 17.10(a)(iii) and (f).}

28 There were other agreements entered into that had an impact on the application of the proceeds of asset sales by the companies. I refer in particular to the Inter-Creditor Agreement [TBGL.03039.011] and the Security Trust Deed [TBGL.00002.011], both dated 8 January 1990.

29 In each case the parties were the Lloyds Syndicate banks, the Australian banks, Lloyds Bank (as the Lloyds Syndicate agent) and WPac (as the Security Agent and as the Australian banks' agent).

30 There is another relevant provision of ABFA and RLFA2 that I should mention, namely cl 7. Clauses 5 and 6 of ABFA dealt with repayments and prepayments. Clause 6.4 provided that moneys repaid or prepaid could not then be re-drawn. The effect of cl 7(a) is that repayments, prepayments and "all other payments made or to be made to SA hereunder" (which would include proceeds of asset sales under cl 17) were, on receipt by SA, to be distributed among the banks in accordance with cl 6 of the Inter-Creditor Agreement. The effect of cl 7(b) is to deem any moneys received by a bank through a distribution by SA under cl 7(a) as a repayment or a prepayment thus reducing the amount owing to that bank by the amount thus received.

31 Clause 6 of the Inter-Creditor Agreement was to operate in the following way:

• Save for moneys recovered under legal action (regulated by cl 7.2) all moneys received by SA under a financing document and available for distribution to the banks were to be distributed by SA on a "Recovered Money Distribution Date" (RMDD) {cl 6(a)}.

• Except when there was an "Enforcement Event", a RMDD was the last business day in each month {cl 6(c)(i)}.

• If there was an extant Enforcement Event (that is, where the loans have been declared to have become immediately due and payable) the RMDD would be a date determined by the Instructing Banks (that is, 67 per centum in value of the banks) or (if there had been no such determination) a date set by SA in consultation with the facilities agents {cl 6(c)(ii)}.

• Unless the Instructing Banks (that is, 67 per centum value) otherwise agree SA must distribute the recovered moneys on or as soon as practicable after the next RMDD following the date of receipt of the funds in the following order:

o costs, charges and expenses of a receivership (if any);

o costs, charges and expenses of SA and the facilities agents incurred in exercising powers or remedies;

o outstanding interest due to any bank under the financing documents;

o pro rata reductions of the principal owing to the banks;

o the surplus, if any, to a borrower or other person entitled.

32 In relation to WPac, the Inter-Creditor Agreement contained some special provisions to cater for the additional exposure of WPac to the group because of the overdraft of $5 million advanced to WAN {see cl 6(d)(vi)(B)}. Where SA distributed monies to WPac it could elect to treat the repayment or prepayment as going to the bill facility or to the overdraft. If it went to the bill facility it could not be redrawn but if it went to the overdraft it could. {See also cls 6.4 and 9 of ABFA}

33 The effect of the Security Trust Deed was to create a trust fund held by SA for the banks. Clause 5 provided that any moneys received by SA pursuant to any security covered by the trust fund were to be applied in accordance with cl 6 of the Inter-Creditor Agreement. The trust fund was defined to include any other assets or security which SA acquired and nominated that it held under the trusts and any assets representing the proceeds of the sale of any such property or the proceeds of enforcement of any security.

34 There was a specific nomination by SA that it was holding as trustee under the Security Trust Deed the various mortgage debentures (for example that granted by Bell Press [TBGL.00066.003.002] and by Bell Group Finance Pty Ltd [TBGL.00066.002]). But (again as an example) the share mortgage granted by Dolfinne Securities Pty Ltd [TBGL.00071.004] has no such nomination.

35 The effect of ABFA cl 17.12 was that unless the banks otherwise agreed (this meant all banks, not the 67 per centum by value) TBGL was required (promptly on receipt) to procure the payment to SA of an amount equal to:

(a) the net proceeds (that is, the proceeds less reasonable selling costs) of the sale of Bell Press and the BRL and JNTH shares {cl 17.12(a)(ii)};

(b) for other assets disposed of by the BPG sub-group, in respect of each transaction, the excess of the net proceeds over $1 million for each transaction but not to exceed $5 million in total for a series of transactions over a six month period {cl 17.12(a)(i)};

(c) for other assets disposed of by TBGL or its subsidiaries (other than the BPG sub-group), in respect of each transaction, the excess of the net proceeds over $1 million for each transaction but not to exceed $5 million in total for a series of transactions over a six month period {cl 17.12(a)(i)}.

36 Clause 17.12(a) of ABFA required SA to deposit the net proceeds in an interest bearing suspense account or accounts as nominated by SA to be applied together with accrued interest on the next RMDD as a prepayment of the bank loans.

37 Clause 6.2 of ABFA provided that the monies TBGL was obliged to cause to be paid to SA were to be applied in accordance with cl 7 of ABFA. Clause 7 of ABFA (and cl 13.5 of RLFA2) provided that SA was to distribute amounts received by it among the banks in accordance with cl 6 of the Inter-Creditor Agreement. Clause 6 of the Inter-Creditor Agreement relevantly provided that SA would distribute money received by it on the next RMDD in accordance with cl 6(d). Clause 6(d) of the Inter-Creditor Agreement provided that unless the Instructing Banks (that is, 67 per centum in value) otherwise agreed the monies were to be distributed by SA as soon as practicable on or after the next RMDD to the banks on a pro rata basis.

38 In what I am about to say I am leaving to one side questions about waivers and consents. The effect of these provisions was that the companies could not keep any of the proceeds of sale from Bell Press, the BRL shares or the JNTH shares. In any six month period they could keep a maximum of $5 million from the sale of BPG group assets and a maximum of $5 million from the sale of other Bell Group assets (such as QNet, GFH shares, the New York apartment, the ITC contract payment and the various Bond receivables). Other than that there was an obligation to pay any proceeds to SA to be applied in reduction of the debts due to the banks.

39 It is important to recognise that there are two separate and yet connected aspects of the plaintiffs' claim. The first aspect is the allegation that the companies were, at the relevant time, insolvent. This underpins the complaints about the effect of the scheme. The second aspect is what might loosely be called the "knowledge claim", namely that the directors and the banks knew about the financial condition of the companies and about the effect of the scheme. The cl 17.12 issue has an impact at both levels.

40 I will use the following abbreviations for the pleadings:

• The Amended Eighth Amended Statement of Claim (1 December 2004) is "8ASC".

• The Amended Defence and Counterclaim (30 April 2003) is "Def".

• The Particulars to the Amended Eighth Amended Statement of Claim (1 December 2004) is "PP".

• The Amended Consolidated Further and Better Particulars of the Defence and Counterclaim (23 December 2004) is "DP".

41 The financing instruments about which the plaintiffs complain in the action were entered into by various companies at various times between 8 January 1990 and 31 July 1990. They include, relevantly, ABFA, RLFA2, the Inter-Creditor Agreement and the Security Trust Deed. The financing instruments are alleged to be part of a "scheme" and it is the effect of the "scheme" that is at the heart of the proceedings. For this reason, par 19A of 8ASC is pivotal. In it the plaintiffs plead:

"The Banks and [companies in the Bell group] were parties to a scheme (hereafter called the 'Scheme') constituted by a series of transactions (each, a 'Transaction') entered into during the period from about 8 January 1990 to about 31 July 1990 (the 'Scheme Period'), effected by or required by the [financing instruments] whereby all significant and worthwhile assets of [companies in the Bell group] were made available to the Banks for repayment of the debts owed to the Banks by BGF and BG(UK) in priority to the claims of all other creditors and future creditors of [companies in the Bell group] (save for certain immaterial exceptions)."

42 In par 16C of 8ASC the plaintiffs plead that there were terms of the agreements to the effect that if the companies sold assets then (subject to irrelevant exceptions) the net proceeds of sale would be paid to WPac to be applied in part repayment of the debts owed to the banks.

43 The plaintiffs plead the effects of the transactions in 8ASC par 33C. Relevantly those effects include (par 33C(f)) that the companies no longer had assets available to meet indebtedness to their creditors or future creditors or to provide a return on equity to shareholders. In PP 33C (sub-par V) it is said that assets, surpluses or money were no longer available to be realised and applied for the benefit of the creditors of the companies but, until all debts owed to the banks were repaid in full, they were exclusively available to the banks to be realised and applied by the banks in repayment of those debts.

44 Paragraphs 20A and 21A plead that by 26 January 1990 BGF was insolvent, nearly insolvent or of doubtful solvency or would inevitably become insolvent. In PP 20A(j) the following is said:

"BGF, utilising such cash resources as it had or could command through the use of its assets, was unable to pay its debts as and when they fell due, and had no such ability to do so within a relatively short time having regard to the nature and amount of the debts and to the circumstances, including the nature of BGF's business, assets and debtors. Accordingly, BGF was insolvent by 26 January 1990. Further, BGF's insolvency by 26 January 1990 may be inferred from the following:

...

(ii) by 21 December 1989 all Banks were insisting, as set out in terms sheets they provided to the Directors, that the Transactions contain provisions that required:

(A) the net proceeds of any or any significant asset sale or sale of shares by any relevant Bell Group Company to be paid to Westpac as Security Agent;

(B) such proceeds to be deposited into an escrow account in Westpac's name and applied by Westpac as a prepayment of the existing facilities under the proposed Transactions on a pro rata basis agreed between the Banks;

(C) prohibition upon any Bell Group Company which was a Security Provider disposing of any assets or shares without the prior consent of the Banks; and

(D) that TBGL and its subsidiaries (and the BPG Group) could not incur any further debt or financial accommodation other than on an unsecured and subordinated basis without the consent of the Banks;

(iii) therefore, even if the Transactions were entered into, the prohibition on borrowing money and the use of proceeds of sale of assets and shares other than to repay the Banks, meant that there was insufficient available money to pay other creditors;

(iv) in particular, as at December 1989:

(A) the proposed fees, costs and charges that would be required by the Banks to be paid by certain Bell Participants in February 1990 as a consequence of entry into the Transactions could not be paid by them, except by realising assets and share sales; and

(B) the interest due to BGNV Bondholders in May 1990 had no prospect of being paid save out of asset sales or share sales,

the proceeds of which the Banks were making plain had to be paid to Westpac as Security Agent to be deposited in an escrow account in Westpac's name to be applied as set out above."

45 In their case that BGF was insolvent by 26 January 1990 the plaintiffs rely on the facts, matters and circumstances set out in the various expert reports and the various Statements of Net Assets ("SNA's") {PP 20A(a)}. But as particularised the case can be summarised as follows:

• By 26 January 1990 the facilities made available by each of the Australian banks were current liabilities repayable on demand. BGF had failed to repay the facilities on expiry and when requested to do so. It was unable to pay those debts and had so advised the banks {PP par 20A(b) to (f)}.

• Certain banks had made formal demands that had not been met but which had been withdrawn {PP 20A(h) and (i)}.

• But for the execution of the financing instruments, the banks or some of them would have made immediate demand for repayment and BGF would have failed to meet the demand {PP 20A(g)}.

• Because of the matters set out in PP 20A(j) (described above) the companies could not have access to asset sale proceeds to fund current liabilities and in particular the fees and charges due to the banks in February 1990 and the interest due to the BGNV bondholders in May 1990.

• Had BGF demanded repayment of moneys owed to it by other Bell group and Bond group companies the latter would have been unable to repay causing a "circular domino effect" of demands on, and the liquidation of, other group companies eventually leading back to demands on, and the liquidation of, BGF{PP 20A(k) to (n)}.

• BGF had no prospect of raising money by mortgaging the receivables due to it by other Bell group or Bond group companies {PP 20A(r)}.

• But for the execution of the financing instruments, there would have been cross-defaults enabling the Insurance Commission of Western Australia ("ICWA") to claim repayment of the principal and interest due under the BGF bond issue leading to the liquidation of BGF {PP 20A(s)}.

• Each (or most) of the relevant companies had a deficiency of working capital or its liabilities exceeded its assets, and on a consolidated group basis there was a deficiency of working capital and the liabilities exceeded the assets {PP 20A(t)}.

• In the seven months to 26 January 1990 many of the Bell group companies made losses {PP 20A(u)}.

46 I need to refer specifically to the material contained in PP 20A(v). In it the plaintiffs say that after 26 January 1990 and during the scheme period certain "facts, matters and circumstances existed and occurred". Those facts, matters and circumstances are:

• The scheme took effect and the companies were unable to pay their debts.

• The financial position of the companies was discussed with the banks at meetings in February 1990.

• Both the banks and the directors had certain beliefs about the need for a restructure to avoid liquidation.

• The directors believed that the income derived by the companies would not, without access to asset sale proceeds, be sufficient to discharge current liabilities.

47 Importantly for present purposes, the plaintiffs say in PP 20A(v)(iii) that after 26 January 1990 and during the scheme period "the Banks granted waivers as pleaded in pars 36AM and AMA". In those paragraphs the plaintiffs say that the banks, by arrangement with the directors, waived compliance with many of the requirements of certain transactions and did so in order to protect the Scheme. The waivers referred to in those paragraphs are listed in the particulars. They include waivers of the requirement that asset sale proceeds be paid into the suspense account and then distributed in accordance with cl 17.12. PP 36AM(a)(iv) and (vi) to (viii) are examples.

48 The pleas in 8ASC pars 20A and 21A are repeated in the same terms in pars 24A and 28B relating to other relevant companies within the Bell group. There is then in par 29B a further or alternative plea that those companies (and some others including Bell Publishing Group Pty Ltd):

" ... upon entry into or as a consequence of entry into its Transactions and the Scheme, ... became insolvent or inevitably would become insolvent."

49 The facts, matters and circumstances by which it is alleged that upon entry into or as a consequence of entry into the transactions and the scheme the companies became insolvent or inevitably would become insolvent are referred to in PP 29B(a) as follows:

" ... each [company] utilising such cash resources as it had or could command through the use of its assets, was unable to pay its debts as and when they fell due and had no ability to do so within a relatively short time, having regard to the nature and amount of the debts and to circumstances, including the nature of its business, its assets and its debtors."

50 PP 29B(b) sets out the debts for which each company was liable "at and from entry ... into the Transactions and the Scheme; and in particular as at 26 January 1990". Ignoring for the moment the identity of the individual companies said to owe the debts (and thus admittedly committing the "group insolvency heresy") and ignoring also the effect of guarantees, the debts listed in PP 29B(b) are:

• Monthly interest due to the Australian banks estimated at $33.2 million payable periodically to 30 May 1991.

• Monthly interest due to the Lloyds Syndicate banks estimated at $28.1 million payable periodically to 31 May 1991.

• Interest on the BGF bond issue of approximately $15 million payable periodically to 30 May 1991.

• Interest on the three BGNV bond issues of approximately $49.8 million payable periodically to 31 May 1991.

• Interest on the TBGL bond issue of approximately $8.2 million payable in December 1990.

• Transaction fees and expenses estimated at about $9.4 million payable at various times to April 1990.

51 In PP 29B(c) it is alleged that none of the relevant companies had any, or any reasonable, prospect of paying out of its own moneys, its liabilities as they fell due because there were insufficient cash inflows and also because:

"(v) assets held by companies within the Bell Group could not be sold or pledged to raise money ... to pay interest and other liabilities as they fell due because, pursuant to [the financing instruments including ABFA and RLFA2], the net proceeds of the sale of any assets sold were required to be paid to the banks in reduction of the debts owed to the banks as pleaded in [par 16C] and the assets could not be pledged without the banks' consent which would not have been forthcoming ... ."

52 The plaintiffs' allegation that the companies were insolvent is the subject of blanket denials in Def pars 20A to 29B. Particulars are given as to what the defendants say was the true financial position of the various companies. Prior to the December 2005 amendments to the particulars there was no specific reference to the release of assets sale proceeds in that portion of the particulars. But DP pars 20A to 33B sub-par (a) says:

"As at 26 January 1990 [the companies] did have a prospect, which was reasonable, of paying their liabilities as they fell due."

53 In DP pars 20A to 33B sub-par (d) the banks say that there was a reasonable prospect that the companies would have available (between 1 January 1990 and 31 May 1991) net trading cash flow of $125 million and that this would be available to meet expected interest liabilities. The items making up the figure of $125 million are set out in sub-par (e). They are said to include the Bell Press proceeds and various recoveries of Bond group receivables.

54 In Def par 33C(d)(1) the banks say that one of the benefits of the transactions was that it allowed the directors to use commercial judgment and business acumen to order the affairs of the Bell group, including {par 33C(d)(1)(vi)} the realisation of assets. Def par 33C is said to be "a further answer to ... pars 7 to 71A of [8ASC]". This includes the solvency pleas in 8ASC pars 20A to 29B. DP par 33C(1)(a)(6) says that the directors were provided with an opportunity to realise assets. Later in that section of the particulars further detail is given. The first sentence of DP par 33C(1)(i) is as follows:

"As to particular (a)(6) above the refinancing documents afforded the directors the opportunity to realise some or all of the following assets in 1990 and thereafter as and when the requirements of the Bell Group required realisations to occur at amounts and on terms which could be agreed commensurate with values which the directors believed could be obtained over time, if such sales were necessary."

55 Paragraph 117 of the plaintiffs' Reply deals with Def par 33C(d)(1). The plaintiffs plead that if the directors had the belief alleged it was not one on which they were entitled to rely or act on and was not one on which an honest and reasonable director would have acted or relied. In sub-par (c) the plaintiffs say that the belief was "inherently speculative and at best a vague hope with respect to the affairs of the Bell group ... in the indeterminate future".

56 There are many aspects of the "knowledge" component of this litigation. I am here concerned only with those aspects that are related to the solvency claims.

57 Paragraph 34(b)(viii) of 8ASC pleads that the directors caused the companies to enter into and give effect to the Transactions and the Scheme knowing that the financial position of the companies was as pleaded in pars 20A to 29B. The significance of this is that in par 39A it is pleaded that in causing the companies to enter into and give effect to the Transactions and the Scheme in the circumstances pleaded in pars 1 to 31P (this would include the knowledge referred to in par 34(b)(viii)), the directors breached their duties to the companies.

58 Both pars 34(b) and 39A are met with blanket denials in the defence. But the matter does not rest there. Def par 48A is said to be (among other things) "a further answer to ... pars 7 to 71A of [8ASC]". This includes the solvency pleas in 8ASC pars 20A to 29B and the knowledge aspects of the pleas in par 34(b) and 39A.

59 In Def par 48A(c)(ii) the banks say the directors believed that the real and substantial benefit provided to the companies by the transactions, in addition to enabling the directors to consider and implement a restructuring of the financial position of each of the companies in the group, included {Def par 48A(c), particular (l)(6)} that it was the expectation of the directors that the banks would from time to time release assets or moneys from the terms of any securities to meet from time to time the liquidity requirements of the group.

60 In DP 48A(c)(l)(6)(i) the banks assert that the moneys the directors expected the banks to release were the proceeds from Bell Press, QNet and Bondnet, the NY Apartment, the BRL shares and the publishing assets. DP 48A(c)(l)(6)(iii) is as follows:

"the best particulars the Banks can presently give are that the directors held this expectation from December 1989 based upon a belief that if the Bell Group required funds that the Banks would act reasonably in consenting to a release in the terms pleaded under the provisions of clause 17.2 of the Australian Banks' Facility Agreement and the Lloyds Supplemental Agreement No. 2 and based upon assurances given by Johny Armstrong to Colin Simpson in the course of negotiation of the refinancing documents. The best particulars that the Defendants can give are that the assurances were given orally between July 1989 and January 1990. The Defendants do not know where the conversations took place. The Defendants do not know whether any other persons were present. The Defendants do not know whether the conversations were recorded in writing. No such writing has been found."

61 In DP 48A(c)(l)(6)(iv) the banks say the assurances were given to the directors through Mr Simpson and the directors believed and were entitled to rely on those assurances. There are several sub-paragraphs of DP48A(c)(l)(6)(iv), including sub-par (L):

"It could have been believed that had a request been made for the Bell Group of companies to utilise the proceeds of asset sales for the legitimate business purposes of the Bell Group so as to advance the long term future benefit and security of the Bell Group, that such request would be acceded to by the banks in terms of the assurances given by Mr Armstrong."

62 In par 122 of the Reply the plaintiffs deal with Def par 48A(c). In Reply par 122(i) the plaintiffs deal specifically with particular (l)(6) to Def par 48A(c) and say that if the directors held that belief or expectation they were not "as a matter of law entitled to take [it] into account when considering whether ... [the companies] were able to pay their debts as and when they fell due from their own resources [and whether] the Transactions and the Scheme ... were of real and substantial benefit to each ... company [and] provided each ... company with the opportunity to carry on business in the expectation such company would be able to carry on business". Sub-paragraph 122(i)(ii) of the Reply says:

"The Directors were not entitled to rely and act upon that belief and expectation and no honest and intelligent director would have so relied and acted, as that belief and expectation ... was inherently speculative and no more than a mere vague hope and in this respect the plaintiffs also repeat the reply to paragraph 33C(d)(1)above."

63 Thus far the pleadings relate specifically to the state of mind of the directors. There are also pleadings that deal with the state of mind of the banks. In 8ASC pars 50 to 55 the plaintiffs plead that as at 26 January 1990 the banks knew of (among other things) the insolvency of the relevant companies. Paragraph 59G alleges that from early to mid-December 1989 until the meetings in Perth in February 1990 the banks believed or suspected that the companies were insolvent. PP contains extensive particulars of those allegations. The plaintiffs' allegations are met with blanket denials with no amplification or particulars.

64 In Def par 65KA, in answer to the Barnes v Addy and equitable fraud claims, the defendants set out a number of things that they say the banks knew or did not know. One of them is that the banks believed that the directors were entitled to believe that the transactions were of real and substantial benefit to the companies for the reasons set out in Def par 48C(c), particular (l). The plaintiffs' Reply does not deal specifically with that aspect of Def par 65KA(d). But it is included in a general denial in par 150(d). And it is countered by a statement in par 150(c) that if the banks held those beliefs they were not reasonably entitled to do so by reason of (among other things) knowledge of matters in (among others) 8ASC pars 50 to 55 and 119, all of which relate back to the insolvency allegations.

65 The plaintiffs say that the banks' opening on solvency seeks to make a case in answer to the plaintiffs' case concerning the implications of cl 17.12 for the solvency of the Bell Group companies which has not been pleaded. The plaintiffs' complaint is that the banks are trying to introduce state of mind evidence of the bank officers concerning the operation of cl 17.12 of the financing agreements. The plaintiffs say that the bank officers are not identified and that the significance of the bank officers "states of mind" is not pleaded and that they will suffer prejudice if the banks are permitted to maintain their case as opened in section 5.4 of Part 77 of the Banks' opening [MISD.00003.033].

66 The contentious part of the banks' opening appears in section 5.4. The plaintiffs summarise what they say is the banks' un-pleaded case by reference to par 307:

"Clause 17.12, properly understood, was not an impediment to the commercial solvency of the Bell Group. The clause provided a mechanism by which the Bell Group could access sale proceeds. Asset sale proceeds (or equivalent sums) are properly to be taken into account in assessing the commercial solvency of companies within the Bell Group as:

307.1 if the inquiry is to be made notionally as at 26 January 1990, the overwhelming probabilities were that consent under clause 17.12 would be given by the Banks;

307.2 the assets pledged were regarded by the Banks as of sufficient value to enable the provision of the Bell Group Press proceeds on the existing pledge under the Transaction documents; and

307.3 the Bell Group did, in fact, have use of the sale proceeds of Bell Group Press and did pay its obligations in February and May 1990 and that fact precludes the Plaintiffs from establishing an inability to do so as at 26 January 1990."

67 Five matters are relied on in the preceding paragraphs in section 5.4 as to why it is said by the banks that if the inquiry is to be made notionally as at 26 January 1990, the overwhelming probabilities were that consent under cl 17.12 would be given by the banks:

(a) As at 26 January 1990 the banks did not want to place the Bell group into liquidation, preferred the control that came with security (including the ability to appoint a receiver if the need ever arose) and to control the process by which assets were sold, and the banks' ultimate desire was to obtain repayment from a going concern rather than seek to recover their loans through any form of enforcement procedure.

(b) Many bank officers as at 26 January 1990 recognised that the Bell group might require access to the proceeds of asset sales to supplement its cash flow going into 1990 and that, having recognised that need, there was no indication that any of the banks understood or considered that cl 17.12 would be any form of impediment to the use of such proceeds for debt servicing.

(c) A significant purpose of cl 17.12 was to prevent the transfer of funds from the Bell group to the Bond group and, in effect, the release of proceeds of asset sales would not have been inimical to that purpose.

(d) The banks' commercial aim was to obtain perfected securities and ultimately repayment and the banks were aware, from the legal advice received, about the operation of the preference laws.

(e) The Court is entitled to have regard to the fact that the Bell group did have access to the proceeds of sale of Bell Group Press to pay its debts as and when they fell due.

68 The plaintiffs have expressed concern at the banks' submission that many bank officers recognised that the Bell group might require access to the proceeds of asset sales. This is of particular concern because of the vague contention that it will be established "when one has regard to the entire body of evidence, including the statements of Messrs Aspinall and Simpson, the statements of bank officers and the banks' documentation".

69 The plaintiffs complain that apart from a few examples given in [MISD.00003.003] the bank officers and the documents to be relied on are not identified. So the plaintiffs say they are not able to identify which banks held what states of mind nor the documents to be relied on. The plaintiffs further say they are in the unfair position of being required to meet an unspecified case in cross-examining the bank officers.

70 The plaintiffs say it can be seen that this aspect of the banks' defence to the solvency case of the plaintiffs involves establishing that certain banks recognised that asset sale proceeds might be required to supplement the cash flow of the Bell group and that certain banks had certain understandings about the use of cl 17.12. The plaintiffs say that the defence involves establishing that the banks had certain intentions, desires and beliefs about not wanting to place the Bell group into liquidation and that benefits would flow from avoiding liquidation.

71 The plaintiffs say that the states of mind of various unidentified banks are relied on by the banks to draw the conclusion about the likelihood of asset sale proceeds being released under cl 17.12.

72 The plaintiffs say that none of these "states of mind of the banks" are pleaded by the banks in their defence to the solvency pleas of the plaintiffs nor is the "defence" as formulated in section 5.4 of Part 77 pleaded at all.

73 The plaintiffs say they have not pleaded to the "new case" of the banks as it has not been pleaded in the defence and the plaintiffs have conducted their case on the limited pleaded defence of the Australian directors' expectations that asset proceeds would be released.

74 As I understand it, at the heart of the plaintiffs' objections to the defendants' opening is the contention that in relation to the impact of cl 17.12 on solvency, the defendants have pleaded state of mind of the directors, and the directors only. There is no pleading that extends state of mind (in so far as it affects solvency) to the banks. It would follow that if the banks wish to rebut the allegation that they had knowledge of insolvency by relying on the operation of cl 17.12 they would have to bring evidence of bank officers' intentions and understanding regarding the operation of the clause and the release of asset sale proceeds. There is no pleading that permits them to do so.

75 The plaintiffs say that on their case, cl 17.12 plays a significant role in establishing the inability of the Bell companies to pay their debts as and when they fell due in the period 26 Jan 1990 to 31 May 1990. The plaintiffs say that cl 17.12 forms part of the "matrix of fact" which gives rise to the prejudicial effects of the transaction. But the plaintiffs' case is that it was the terms of the financing documents executed on 26 January 1990 that condemned the companies to insolvency. That is the case they foreshadowed in opening and it speaks by force of the documents themselves (namely, cl 17.8 to cl 17.12) and focuses on the expectation of the directors. It does not deal with the question whether consent would be forthcoming in the future. As senior counsel put it in oral opening:

" ... it will be our case that the ... directors did not seek the consent of the banks to otherwise agree before they entered into the transactions. They signed these documents without having agreement from the banks that these moneys would be released to assist Bell Group Finance Pty Ltd. ... They didn't say to the banks, 'Before we sign this we want to get your agreement to release those moneys, otherwise we will be signing our own death warrant, and we won't be able to use them'."

76 The plaintiffs refer to Def par 33C(d)(1), sub-pars (i) to (ix) of that paragraph, particular (l) to Def par 48A(c) (especially particular (d)) and Def par 48A(g). They point out that these clauses are all confined to the state of mind (beliefs and expectations) of the directors, not the banks. They also say that to the extent that Def par 65KA pleads the state of mind of the banks it does so in answer to the Barnes v Addy claim, not solvency.

77 The plaintiffs maintain that in the Reply they have not pleaded to the banks' case as it was put forward in section 5.4 of Part 77 of their opening. Rather, pars 117 and 122 relate to the state of mind of the directors. Thus, the allegation that the belief that the banks would act reasonably if requested to release funds was "inherently speculative and at best a vague hope" went to the state of mind of the directors. It did not seek to answer a case that as a matter of fact "the overwhelming probabilities were that consent under clause 17.12 would be given by the banks" or a case that the banks held a state of mind to the same effect.

78 In summary on the reply, the plaintiffs say there has been no occasion for them to plead to the case concerning cl 17.12 in relation to solvency which they say is now put forward by the banks in section 5.4 of Part 77 as it has never been pleaded or particularised.

79 The banks contend that the insolvency of the companies is a live issue and that the cl 17.12 question is a relevant component of that issue. And it is one that arose initially on the plaintiffs' case, not the banks' case, and that the material referred to in section 5.4 is legitimately raised in answer to the plaintiffs' pleaded case.

80 The banks contend that the plaintiffs plead no material facts concerning the operation of cl 17.12 or its implications for the solvency of the companies. It is only raised in the particulars. Insolvency is pleaded as a material fact in (among others) 8ASC par 29B. The banks draw attention to PP par 29B(c)(v) the effect of which is that as at and from 26 January 1990 the companies had no reasonable prospect of paying out their liabilities out of their own money. This was because assets held by companies could not be sold or pledged to raise money to pay interest and other liabilities. This, in turn, was because, pursuant to the terms of the instruments pleaded in 8ASC par 16C (including cl 17.12), the net proceeds of sale of any assets sold were required to be paid to the banks in reduction of the debts owed to the banks and the assets could not be pledged without the consent of the banks.

81 From this particular the defendants say that the plaintiffs have raised, in support of the material fact pleaded in 8ASC par 29B, the insolvency or inevitable insolvency of the companies and have given notice that they would be presenting a case that canvassed the following issues:

• the prospect, including the reasonableness thereof, of the companies paying their liabilities out of their own money as they fell due;

• whether or not assets held by companies could be sold or pledged to raise money to be made available to them in the light of (among other provisions) cl 17.12;

• whether or not the net proceeds of sale of any assets sold were required to be paid to the banks, in reduction of the debts owed to the banks, in terms of (among other provisions) cl 17.12; and

• whether or not the banks' consent to the pledging of assets held by companies would have been forthcoming.

82 The defendants have also pointed out that the plaintiffs plead in 8ASC pars 36AM and 36AMA that the banks took steps to facilitate and to protect the Scheme. These steps were designed (among other things) to ensure that the securities taken as part of the refinancing hardened. Those paragraphs also allege that after 26 January 1990 and during the Scheme Period the banks granted certain waivers. One of the waivers particularised relates to the waiver under cl 17.12 in relation to the Bell Press proceeds.

83 The banks have denied each and every allegation of material fact pleaded in 8ASC pars 20A to 29B. They say they have not, (as they are not required to do) pleaded to the particulars furnished by the plaintiffs in support of 8ASC pars 20A to 29B and nor have they pleaded the evidence (as they cannot do) which they intend to lead.

84 The banks contend that the traverses of the allegations of material fact pleaded by the plaintiffs in 8ASC pars 20A to 29B cast upon the plaintiffs the burden of proving those allegations, which may be defeated by, among other things, the banks calling evidence to show, on the balance of probabilities, that the plaintiffs' allegations are not correct.

85 But the banks also say they have gone beyond a mere traverse and that they have set up a positive case on cash flow, as outlined in DP pars 20A to 33B sub-pars (a), (d) and (e). The question is the extent to which this incorporates the effect of cl 17.12.

86 The banks denied the allegations by the plaintiffs that, as at 26 January 1990, cl 17.12 prohibited asset sale proceeds being used by the companies for working capital purposes and denied that, as at 26 January 1990, the effect of cl 17.12 was that the relevant Bell group companies became insolvent or inevitably would become insolvent.

87 The banks' reliance on the availability to the Bell group of asset sale proceeds post 26 January 1990 is expressly particularised in DP par 20A to 33B sub-par (e). Those particulars are in the context of the admission by the banks as to the terms of cl 17.12 (subject to the banks referring to the agreements at trial for their full terms and effect) and the banks' witness statements which deal with the probability of the banks consenting to the use of asset sale proceeds for legitimate corporate purposes.

88 It is the banks' contention that the plaintiffs bear the burden of proving the material facts pleaded by them, as understood by the way in which they have particularised them. The banks are entitled, by their traverses, to call evidence to refute the allegations relied upon by the plaintiffs and show them to be incorrect, in particular, the allegations that:

• the companies could not, by utilising such cash resources as it had or could command through the use of its assets, pay its debts as and when they fell due;

• insolvency is to be inferred from the banks' alleged insistence that the Transactions contained provisions requiring asset sale proceeds to be paid to Wpac and applied by Wpac as a prepayment of existing facilities;

• even if the Transactions were entered into, cl 17.12 "meant" that there was insufficient available money to pay creditors, other than the banks; and

• the banks were "making plain" that asset sale proceeds had to be paid to Wpac, as SA, to be deposited in an escrow account in Wpac's name and applied by Wpac as a prepayment of the existing facilities.

89 The banks say that in their opening on solvency outlined, in relation to the use of asset sale proceeds, the evidence that would be led by them show that the plaintiffs' allegations of material fact as to the insolvency of the relevant Bell group companies, as supported by the particulars, are not correct. That is, the banks outlined the evidence they would lead in support of their denials of the plaintiffs' allegations of insolvency upon which the plaintiffs bear the onus. The banks say that evidence will provide the foundation for a submission that the plaintiffs have not established an inability of companies in the Bell group to have had access to the proceeds from the sale of Bell Press.

90 I return now to the plaintiffs' contention that the attempt by the banks to rebut the allegation that they had knowledge of insolvency by relying on the operation of cl 17.12 is a "new case". The answer is, I think, yes and no.

91 Two things are unquestionably live issues on which the parties are joined on the pleadings. First, were the companies insolvent by 26 January 1990? Secondly, did the companies become insolvent as a consequence of entry into the Transactions and the Scheme? It is common ground that the Transactions include ABFA and RLFA2 and that cl 17.12 is an element of the Transactions. It is also common ground that the companies needed access to asset sale proceeds in order to meet their liabilities in the period after 26 January 1990.

92 I have no criticism of the plaintiffs' pleading of the cl 17.12 issue. In 8ASC par 16C they plead the effect of cl 17.12 (without identifying it by number). This is clearly part of their insolvency case: see, for example, 8ASC par 33C(f) (which incorporates par 16C) and PP par 33C sub-par (V) and PP par 20A(j). But the extent to which the banks put cl 17.12 and its effect on the solvency issue is more difficult to discern from their pleadings. There is no clear reference in the defence itself to cl 17.12. That is a little surprising given that I regard the cl 17.12 issue as one of the three pivotal questions on which the case is likely to turn. Those three issues are:

• Taking a "snap-shot" as at 26 January 1990, were the companies insolvent?

• Were there reasonable prospects of the companies having access to asset sales proceeds to meet on-going liabilities?

93 The statement that the absence of clear reference to cl 17.12 in the defence is one that I admit to making with the considerable benefit of hindsight. But normally if the construction or effect of a contractual provision is in issue it is pleaded as a material fact. Here, the banks have not asserted (expressly) as a material fact the effect of the clause. As the analysis that I have set out above shows, it has to be teased out by a process of reduction, inference and cross-referencing.

94 To understand the intricacies of this pleading dispute it is necessary to look at the meaning of the term "insolvency". It is to this that I now turn.

95 Section 95A of the Corporations Act deals with the meaning of insolvency by saying that a person is solvent if, and only if, the person is able to pay all the person's debts as and when they become due and payable and a person who is not solvent is insolvent. It is a moot point whether, for the purposes of this case, the words "from the person's own moneys" should be added to the definition. But I do not think that is material to the present argument. Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666 remains the leading authority on the meaning of insolvency. Barwick CJ had this to say at 670 - 671:

"Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due."

96 Insolvency is a question of fact to be determined according to the "commercial realities" in the light of all of the circumstances: Taylor v Australian and New Zealand Banking Group Ltd (1988) 13 ACLR 780 at 784; Sheahan v Hertz Australia Ltd (1995) 16 ACSR 765 at 769. In Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 Palmer J commented on the notion of "commercial reality" in this context. At [54], in the process of formulating a number of relevant principles and after commenting that insolvency is to be assessed by considering the company's financial position as a whole, his Honour said (omitting citation of authorities):

" ... in considering the company's financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable: ... ."

97 I have said on many occasions during the trial that, in the context in which it arises in this case, insolvency has both objective and subjective elements. The test whether a company is insolvent on a particular date is essentially objective. The test whether nominated persons knew of that state is essentially subjective.

98 When I say that the initial question is essentially objective I do not mean to suggest that it can always be determined by empirical facts devoid of questions of judgment. Indeed, that will seldom be the case. Take a simple example. Suppose a company had one asset, unencumbered cash on deposit of $1 million, and one liability, a simple debt in a sum certain of $200,000. That company would not, on any view, be insolvent. But suppose the company had one asset, unencumbered real property that had been the subject of separate market appraisals of $1 million and $1.5 million respectively, and one liability, an unliquidated claim estimated at somewhere between $1.25 million and $1.4 million. In the latter case solvency can only be assessed by a process of judgment as to the true value of the real estate and as to the amount at which the unliquidated claim would finally settle.

99 The process of judgment involved in the second example is essentially objective. It is not to be determined by what the directors of the company actually believed but by what a reasonable observer would have ascertained looking at all of the circumstances in which the company then found itself. In a case such as this one, the trier of fact must put himself or herself in the position of that reasonable observer.

100 Less difficulty is posed by the subjective elements of the insolvency case. The plaintiffs plead that the directors knew the companies were insolvent and that the banks also knew this to be the case. That is all relatively standard fare in a case of this nature.

101 It seems to me that in determining the commercial realities in the light of all of the circumstances of this case, the effect of cl 17.12 arises squarely as an issue. Put another way, the commercial realities include the question whether cl 17.12 was likely to be applied should the companies demonstrate a requirement for access to asset sale proceeds to meet liabilities.

102 While the banks say that they have put a positive case on cash flow (and I accept that is so), in relation to the effect of cl 17.12 on the objective solvency question they are forced to rely mainly on their general denials of 8ASC pars 16C and pars 20A to 29B. I have set out above a summary of what the banks say about the burden of proof. In it the banks rely on what they say flows from the traverse. I am not comfortable with all of those propositions.

103 I do not think there is much doubt that the plaintiffs bear the burden of establishing, ultimately, that the companies were insolvent at the relevant time. In practical terms as part of that burden they must establish that:

• the companies, utilising such cash resources as they had or could command through the use of its assets, were unable to pay their debts as and when they fell due and had no ability to do so within a relatively short time; and

• one of the reasons for this was that if the companies sold assets then (subject to irrelevant exceptions) the net proceeds of sale would be paid to WPac to be applied in part repayment of the debts owed to the banks.

104 The second bullet point arises from the existence in ABFA and RLFA 2 of cl 17.12. All that the banks have said about it (in the defence to 8ASC pars 16 to 16D) is that they will refer to the agreements at trial for "their full terms and effect". In the contentious part of their opening the banks say that cl 17.12, properly understood, was not an impediment to the commercial solvency of the Bell group. They assert that the clause provided a mechanism by which the Bell group could access sale proceeds. They further say that asset sale proceeds are properly to be taken into account in assessing the commercial solvency of companies within the Bell group because, among other things, as at 26 January 1990, the overwhelming probabilities were that consent under cl 17.12 would be given by the banks.

105 This, it seems to me, is a positive assertion that the commercial realities were such that cl 17.12 would operate in a particular way and it was a way quite different from that contended for by the plaintiffs. In essence the banks are saying that the commercial realities would lead to a situation where the "overwhelming probabilities" were that all 20 banks would consent to the release of funds if necessary and that this situation applied as at 26 January 1990. The banks may well bear at least an evidentiary burden (whatever may be the true meaning of that phrase) about this commercial reality. Even if that were not the case, the bare denial leaves the position uncertain. Are the banks saying the commercial reality arises from what is, in effect (if not in strict theory), an implied term or a collateral contract as to the way cl 17.12 would operate? If not, from what does the commercial reality spring?

106 The reason for having pleadings is well known. Put succinctly it is to delineate and confine the issues so that the parties will know the case they have to meet. In this instance (and subject to what I say below) I am not at all sure that the bare denials in the defence would be sufficient to put the plaintiffs on notice that the case they would have to meet involved the particular aspect of commercial reality to which I have referred.

107 I am not suggesting that the state of mind of the banks would not be relevant in deciding what the commercial realities were. But I am here dealing with the pleading of the issue, not the relevance of evidence to be led in support of the position for which a party contends.

108 In their opening, the banks also contended that the cl 17.12 issue involved a question of construction. The banks contend that on the proper construction of cl 17.12 the provision as to the consent of all the banks was a qualification on the obligation of TBGL to pay asset sale proceeds to Wpac promptly upon their receipt. The banks further contend that this question will have to await a review of the evidence of the factual matrix in which the parties were operating when the Transactions were entered into. This would include evidence of the circumstances surrounding the Transactions, and the aim, object or commercial purpose of the Transactions as part of the factual matrix against which the parties contracted. Thus, the banks say, that the plaintiffs have raised the prospect or likelihood or probability of all the banks agreeing, as required by cl 17.12, which in turn raises the issue of the banks' states of mind in relation to that provision.

109 Of course evidence of surrounding circumstances is admissible in the interpretation of the contract if (and only if) the language is ambiguous or susceptible to more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Interpretation of a contract proceeds on the presumed, rather than the actual, intention of the parties. Evidence of the actual subjective intention of the parties is not admissible as an aid to construction if for no other reason than that their respective intentions are taken to have been superseded by and merged in the written document. In this respect we remain governed by what was said in Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 as affirmed in Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 76 ALJR 436 at [39] and [104].

110 I have read cl 17 several times. And I have considered it in the context of the agreement as a whole. With due respect to the drafts persons, it is convoluted and difficult to comprehend but that does not, of itself, mean that it is ambiguous. I have not heard argument as to whether there is ambiguity within cl 17.12 and this is not the occasion on which I should rule on that point. It is sufficient to say that if there is ambiguity such as to permit the reception of extrinsic evidence the type of admissible state on mind evidence will not be that which goes to the subjective intention of the banks. Rather, it will be evidence of facts known to both parties that is relevant to the presumed intention. The dealings between the parties may fall into this category. But this does not answer the pleading issue.

111 In my view where one party asserts a particular construction of a contract and the other party contends for a different construction, the latter should plead it as a material fact. This the defendants have not done.

112 A nice question might arise as to whether state of mind evidence that is relevant in deciding what I have earlier described as the commercial realities is, in effect, evidence of subjective intention. If so, additional care will have to be taken to ensure that evidence is only taken into account on a question in respect of which it is properly admissible.

Incorporation of Other Aspects of the Pleadings

113 In introducing this section I said that the answer to the question whether the banks were advancing a new case was yes and no. What I have said about the absence of a clear pleading of material facts about the commercial realities and the construction question is the "yes" part of that answer. But there are other aspects of the banks' defence and particulars that have to be considered. There are two aspects in particular that form the basis of the "no" part of the answer.

114 First, the plea of the effects of the Scheme and the Transactions in 8ASC par 33C draws on, and is itself a part of, the insolvency allegations. And PP par 33C (V) is another recitation in general terms of the regime under cl 17.12. In Def par 33C(d)(1) the banks raise the prospect of (among other things) the directors realising assets. This is said to be an answer to (among other things) numbered paragraphs of 8ASC that include the insolvency pleas. I have already set out again the text of DP par 33C(1)(i) which related to the realisation of assets. The opportunity to realise assets is said to arise "from the refinancing documents", and envisaged to occur "when the requirements of the Bell Group required" on terms "which could be agreed". This suggests the cl 17.12 regime. Under the refinancing agreements the companies were not obliged to repay the principal due under the facilities until 31 May 1991. It would not make much sense to read the phrase "requirements of the Bell group" to mean the ultimate repayment of the principal or even a pre-payment (which the companies were not obliged to make). One possible interpretation is that it refers to "requirements" in the sense of on-going liabilities.

115 The second aspect relates to the what the banks have characterised as their "positive cash flow case". The combination of 8ASC par 16C and PP pars 29B (b) and (c)(v) can be described as including allegations of the following matters:

• they were insolvent because they had no reasonable prospect of meeting liabilities from their own moneys;

• they had no reasonable prospect of doing so because they would need to sell assets to meet liabilities; and

• if they did sell assets the proceeds would go to the banks to pre-pay bank debt and would not be available to meet liabilities.

116 I have earlier described the effect of DP pars 20A to 33B. They contend that as at 26 January 1990 the companies did have reasonable prospects of paying liabilities as they fell due. They then set out the cash flow items that would be available to meet liabilities. And one such item is the proceeds from the sale of Bell Press. It is common ground that the Bell Press proceeds were caught by the cl 17.12 regime. If that is the case the companies could only have had access to those proceeds if the banks had consented to their release. It is implicit in this that cl 17.12 was not an absolute bar to use of the funds.

117 All of this is raised in the context of what I have earlier termed the objective aspect of the insolvency case. This brings me back to the concept of commercial reality, which, as I have already said, is part of the matrix against which insolvency falls to be assessed. "Commercial reality" is a commonly used phrase in modern jurisprudence. But an analysis of the authorities shows that the courts have not attempted to define what it means. This is not surprising because, as a concept, it must cover a myriad of situations and, as a matter of linguistics, it is simple and easy to understand. In the context of this case it simply means something that is actual rather than strictly theoretical.

118 In the cases on insolvency, "commercial reality" is often used in the sense of a generally accepted or common norm of business practice. In that sense it has an objective element. But it can also mean something that is practical and businesslike. I can see no reason why, looked at in that light, commercial reality should not permit a scrutiny of what the parties to a commercial transaction contemplated as a practical and businesslike outcome to their relationship. Of course, this must always defer to legal principles governing the construction of contracts, the implication of terms, the divination of collateral agreements and the like.

119 I have come to the view, on balance, that the question whether or not it was probable the banks would consent to the release of funds if necessary is raised on the pleadings as an answer to the plaintiffs' insolvency case. Having said that, the pleading is unsatisfactory for a number of reasons. It is not clear that the banks' state of mind is a component of the allegations. It has to be teased out. It relies on particulars for matters that should have been asserted as material facts. But it is there.

120 For the sake of completeness I should say that I have not placed much reliance on the pleadings in Def pars 48A and 65KA. They go essentially to the knowledge case. It is true that by cross-referencing to cross-references those paragraphs relate back to and incorporate the insolvency pleas. But that process is eristic. From time to time I have been tempted to resort to extispicy to predict where the process of following through the various cross-references might lead. Thus far I have resisted the temptation.

121 Because of the deficiencies in the pleading I would not normally have allowed them to stand. But there are peculiar circumstances. The problem first arose during the banks' opening, nearly two years into the trial. But in my view even had the plaintiffs known about it from the start it is unlikely that the shape of their case would have changed. When the matter was argued I indicated that, pending resolution, the plaintiffs should cross-examine bank officers on the basis that it was a live issue in the solvency case. I do not think the plaintiffs have been prejudiced in that respect.

122 There is another question. As I have already said, I believe the solvency question to be critical to the resolution of the case. I also believe that the cl 17.12 issue is a material part of the solvency case. And it may be necessary (depending on how the respective cases are put to me in closing) to have regard to commercial realities to resolve those questions. I would prefer to do this on what I regard as the real questions that must be determined from the pleadings (properly constructed) and without undue prejudice to a party.

123 By order made 14 December 2005 the banks were given leave to amend DP. They have filed and served a document dated 23 December 2005 entitled amended consolidated further and better particulars of the defence and counterclaim. That document contains new particulars covering the cl 17.12 issue. I have no idea how to describe them by a paragraph number but they appear under a heading "Particulars relating to the use of the proceeds of sale and clause 17.12" at pp 260 to 322 of my hard copy. They appear to be part of the particulars to Def pars 20A to 33B. They contain the following elements (among others):

• It is likely that if the companies required access to asset sales proceeds to meet outgoings all banks would consent (par (1));

• As at 26 January 1990 the banks recognised that asset sales proceeds might be required to supplement cash flow (par (2)(a));

• Clause 17.12 provided a mechanism for the release of asset sale proceeds if required (par (2)(b));

• The banks wanted to support the companies so they would remain a going concern and not go into liquidation, they wanted to achieve perfected securities and they were aware that if the companies went into liquidation within six months the securities could be set aside (pars (2)(d) and (e));

• The banks regarded the assets as of sufficient value to enable proceeds of sale to be released (par (2)(h));

• The companies in fact had access to asset sales proceeds in 1990.

124 The particulars then go on to examine the position, bank by bank. They identify the individual officers concerned and describe the states of knowledge or belief that each had.

125 There will no doubt be arguments about relevance of some of these matters to the solvency question. That is a matter for another day. At this stage of the trial I do not intend to pursue the fascinating question whether certain things should be pleaded as material facts or whether it is sufficient that they be included in the particulars. I think the new particulars on pp 260 to 322 of the 23 December 2005 version of DP are sufficient to put the plaintiffs and the Court on notice of the case the banks propose to advance. The trial should continue accordingly.

The Draft Judgment Structure - Introduction

126 On 15 December 2004 I distributed to the parties a document that I had prepared called "the draft judgment structure" (DJS). There are several reasons why I have produced the DJS. First, I felt I needed to identify what I understand to be the issues that the parties have raised in their respective cases. Secondly, it will indicate the form which the judgment is likely to take. Thirdly, it can serve as a guide to the parties as to the way in which they might structure their closing submissions.

127 On 21 September 2005 the banks produced a marked-up draft of the DJS for consideration. The discussion that ensued on that day indicated that there may be at least two areas in which there are material differences of opinion between the parties as to pleading issues. Those two areas are:

• Whether the "succession of broken promises and the banks' lack of trust in the directors" was part of the Barnes v Addy case.

• Whether "avoiding disclosure to LDTC" was an element of protecting the scheme and thus part of the equitable fraud claim.

128 The parties exchanged correspondence about these questions on 21 October 2005 and 2 December 2005. It now falls to me to indicate how I view each of these questions. I will deal with them in turn. In so doing I will not repeat my general comments about the pleadings and the way I have approached them.

129 For sake of completeness I should add that at the commencement of the exchange of correspondence there was a third issue in contention, namely whether "taking steps to protect and facilitate the scheme" was part of the "impugned conduct of the directors". This seems to have been resolved by agreement.

130 This issue can be succinctly summarised. In the period after Bond gained control of TBGL (mid-1988) through to about July 1989 the management of TBGL on various occasions indicated to the banks that their respective facilities would be repaid (or in the case of the Lloyds syndicate pre-paid) in whole or in part. The projected payments were never made. The plaintiffs say that by July 1989 the banks realised that the Bell group would not (or could not) repay the facilities and the negotiations for the refinancing began in earnest. The plaintiffs also say that this "succession or litany of broken promises" caused the banks (or some of them) to mistrust the directors of TBGL and that this lack of trust continued throughout the refinancing negotiations.

131 In cl 11 of the DJS I deal with the Barnes v Addy claim. Clause 11.5 deals with the conduct of the banks in that context. One of the sub-headings (cl 11.5.2) is the succession of broken promises and mistrust of the directors. The banks submit that there is no part of the pleading or particulars that would justify the inclusion of this issue in the Barnes v Addy claim.

132 The allegation that the banks knowingly participated and assisted in the breach of duty by the directors is to be found in 8ASC pars 65H to 65J. This is said to arise "by reason of the matters pleaded in pars 16 to 19C, and 49 to 59U". This therefore includes par 50 in which it is alleged that as at 26 January 1990 the banks knew of the matters in par 20A. Paragraph 20, in turn, includes an allegation that the banks knew of the insolvency of BGF. There are similar pleas for other relevant companies. PP pars 20A(c) and (d) detail (in relation to each of the Australian banks) the various arrangements that were made for repayment, particularly those relating to repayment by 31 March 1989 and subsequent extensions. It is then said in PP par 20A(e): "BGF had failed to repay each debt at the expiry of the relevant arrangement".

133 The plaintiffs acknowledge that the particulars do not contain the phrase "broken promises" but they contend that it is not necessary so to do. They say that this is no more than a convenient characterisation of the arrangements and communications specified in PP par 20A. It seems to me that whether they are called broken promises or arrangements not met is (at least for present purposes) of little moment. They are raised as part of the factual matrix on which the plaintiffs will rely in support of their argument that the companies were insolvent. This, in turn, is part of the store of knowledge alleged against the banks. That store of knowledge (in turn) is part of the allegation of knowing participation in the breaches of duty.

134 Similarly, neither 8ASC nor PP refers to the banks' lack of trust of the directors. In their defence to the Barnes v Addy claim (Def par 65K(d)(4)(x)(B)) the banks plead that they were entitled to believe that the directors were entitled to believe that to avoid a winding up it was necessary "to retain the confidence of the banks". It is torturing the language to say that "retain" means "regain, and then keep, that which had previously been lost". But Def par 33C(d)(1)(ix) (which, I accept, is not of itself part of the Barnes v Addy pleadings) refers to the directors having an opportunity, as at 26 January 1990, "to gain" the confidence of the banks. The natural meaning of "gain" is that the entity is obtaining something it did not previously have. Perhaps the reference to "retain" in Def par 65KA has to be read accordingly.

135 That having been said, there is evidence adduced by the banks that could be interpreted as indicating that in mid 1989 there was a lack of trust by bank officers arising from the "broken promises". I refer, by way of example to [WITD.026.001] pars 103 and 105 (Aspinall). Many of the bank officers have said in their witness statements that they relied on the directors. It is not drawing too long a bow to suggest that if a person "relies" on someone else she or he will usually "trust" them. There is other evidence discovered by the banks, in which issues of credibility and lack of trust are mentioned: for example [TBGL.35604.064] (p 5), [TBGL.03721.230] (p 3), [207.17.0045] (p 1) and [TBGL.05005.171] (p 1). Once again, as a pleading issue this is not particularly satisfactory. But the plaintiffs are entitled to test the positive assertions that bank officers relied on the directors with the contrary proposition that in fact they mistrusted them. Given that this issue has been on the table since the early stages of the trial I think I should give the plaintiffs the opportunity (if they can) to marry the two limbs (broken promises and mistrust) as part of the Barnes v Addy case.

136 So far as I am concerned, cl 11.5.2 (as originally formulated) should remain in the DJS.

137 In 8ASC pars 36APA to 36APC the plaintiffs plead, as one of the "steps taken to facilitate and protect the scheme", that a condition imposed at the time of the May waiver was that TBGL should meet with LDTC to inform them of the financial position of the group and of the plans to restructure. It is also alleged that in July 1990 that condition was waived because the banks and the directors agreed it would not be in the best interests of the banks and the shareholders to do so.

138 I had originally included all of the "steps taken to facilitate and protect the scheme" as part of the case on breach of directors duties. It is common ground that it would not be appropriate to include them in that section. Instead the defendants have proposed to move them to cl 12 of the DJS as part of the equitable fraud claim. But in so doing they delete the matters pleaded in 8ASC pars 36APA to 36APC. The plaintiffs say those allegations should remain in the equitable fraud section.

139 There may be a relatively simple answer to this. I think I resolved the pleading point in favour of the plaintiffs in The Bell Group Ltd (1): see pars [198], [199], [219], [220] and [221]. Whether that was right or wrong is not to the point. There are two hurdles the plaintiffs will have to overcome if they are to make good the allegations. First, there is no plea of a duty on the banks to advise LDTC of anything. Secondly, only four of the banks imposed the condition. But that is a matter for another day. It does not overcome the fact that in an earlier judgment I took a view on the adequacy of the pleading.

140 I think the substance of cl 7.3.3.7 (as formulated in the original DJS) should remain but that it should be shifted to cl 12.