The recent decision of the NSW Court of Appeal in Anchorage Capital Master Offshore Ltd v Sparkes highlights the challenges faced by lenders seeking to prove insolvency and establish liability for misrepresentation. Our Banking & Finance specialists, partner Emma Donaghue and lawyer Kate Dart, discuss the case and some key takeaways for lenders.
Arrium, a publicly listed company in Australia, operated in multiple countries. Arrium’s businesses included its mining consumables business, MolyCop.
Following negative impacts on Arrium’s business during 2015 due to falling iron ore prices, the board undertook a strategic review, including a sale process for the MolyCop business.
Arrium continued to utilise its finance facility during this process and issued numerous drawdown and rollover notices to its lenders. Each notice contained representations to the effect Arrium was solvent and there had been no change to Arrium’s financial position which constituted a material adverse event.
Final bids for MolyCop received in February 2016 were considered unacceptable by Arrium’s board. Shortly after, in accordance with recommendations from its advisors, the Board resolved to include a going concern note in Arrium’s half-year accounts. Arrium was subsequently placed into voluntary administration in April 2016 and went into liquidation in 2019.
Various proceedings were commenced following the failure of Arrium, including two sets of proceedings brought by two groups of banks. The lenders alleged the drawdown and rollover notices contained false representations and, if not for the false representations, the lenders would not have advanced funds to Arrium. The lenders further asserted that had they not advanced these funds, Arrium would have been placed into administration sooner “when there would have been a better return to creditors”.
In dismissing the appeal, the NSW Court of Appeal said:
Ensuring the right representations and warranties are provided at the appropriate times is extremely important but needs to be coupled with a more fulsome approach to loan management. This needs to include requirements for information relevant to the lender’s assessment of the borrower being provided in a timely manner, not only at the commencement of the loan but also during the loan term. Lenders also need to ensure they have thorough processes and procedures in place to continually assess the financial position of borrowers and not just adopt a ‘tick and flick’ approach.