In one of the longest civil trials ever heard in Australia (relating to the Bell Group), Justice Owen in the Supreme Court of Western Australia, found against a group of 20 financiers for their action in taking securities over the Bell Group whilst it was insolvent.
In the mid 1980s the Bell Group had independent facilities with 6 banks in Australia and facilities with a syndicate of 14 other banks in Europe, Canada and the Middle East. All facilities were unsecured but supported by negative pledges.
Following the stock market crash of October 1987, debt reduction strategies and changes in shareholdings were implemented within the Bell Group. In the second half of 1989, it became clear that the debts owed to the Australian banks by the Bell Group could not be repaid. At that time, the Bell Group owed approximately $262 million to its financiers. Negotiations shortly thereafter began to restructure the bank facilities, the key elements of which were:
- an extension of all facilities (including those offered by banks located overseas)
- the taking of security over the worthwhile assets in the Bell Group
- a condition which provided that if any group assets were sold during the currency of the facilities, the proceeds of sale were to go to the banks pro rata in reduction of the banks' debt
- the subordination of a significant portion of the intra-group indebtedness to the claims of the banks.
Between mid 1990 and March 1991, the banks agreed to defer monthly interest payments owed by the Bell Group on several occasions. However, they were unprepared to advance further funds to the Bell Group in March 1991, and in April 1991 they issued formal notices of demand on The Bell Group Ltd (In Liquidation) (TBGL) and one of its subsidiaries in relation to unpaid interest.
TBGL applied to the Supreme Court of Western Australia for a provisional liquidator to be appointed. The banks consequently realised their securities and recovered approximately $283 million. In 1995, the liquidators of the Bell Group commenced proceedings against the banks challenging, amongst other things, the validity of the securities and seeking to recover the proceeds realised by the banks. Soon after, the trustee of the bondholders of a subsidiary of TBGL joined as a plaintiff to the proceedings.
Arguments advanced by the parties
Broadly, the plaintiff liquidators argued that:
- the main companies in the Bell Group were insolvent at the time the securities were given, and both the directors of the Bell Group and the banks were aware of this
- the effect of the securities was to give priority to the banks over the claims of all other creditors of the Bell Group and this prejudiced its creditors
- the giving of securities was a breach of the directors' duties of which the banks were aware meaning that the banks received property in breach of trust consistent with the principles in Barnes v Addy (1864) LR 9 Ch App 244.
In response the defendant banks disputed these claims and filed a counter-claim challenging the priority of the on-loans made to companies within the Bell Group from the proceeds of bond issues claiming those on-loans provided by the bondholders were subordinated to the banks loans resulting in the bond holders not suffering prejudice by the banks' actions to the extent claimed.
This case dealt with a large number of related issues. However, this article will focus on the three claims above.
Justice Owen ultimately found in favour of the liquidators and the trustee and the banks were ordered to pay various forms of monetary compensation including restoring the proceeds of sale from a number of Bell Group assets.
In relation to solvency, it was held that the Bell Group companies were insolvent when the securities were given to the banks. It was further held that the banks provided financial accommodation to the Bell Group despite knowledge that:
- the Bell Group companies were likely to be insolvent
- no corporate benefit resulted to the Bell Group companies as a result of entering into the securities and agreements with the banks and that any future benefit was unlikely in light of the financial position of the Bell Group.
It was further held that the giving of securities by the Bell Group prejudiced its creditors as all of the worthwhile assets of the Bell Group were made available to the banks for repayment of outstanding debts in priority to the current and future creditors of the Bell Group. However, in relation to the bondholders, it was held that the bondholders were subordinated to the claims of the banks. Therefore, the liquidators and the bondholder's trustee were not successful in establishing the full level of prejudice to creditors that was claimed.
On the issue of the directors' fiduciary duties, Justice Owen held that the giving of the securities and the agreements with the banks was a breach of the directors' duties. Specifically, the directors were held to have breached the fiduciary duties that they owed to the companies to act in the best interests of the companies and to exercise powers only for proper purposes. The Court found that the banks were aware of this and as a result, knowingly received trust property when they received funds from the realisation of their securities.
The Bell Group decision indicates that the taking of security over companies that are in a precarious financial position poses a significant risk for financiers. Furthermore, the decision will likely influence financiers in deciding whether to provide financial accommodation to companies in serious financial difficulties. However, it is expected that appeals from the decision will be commenced and until resolution of any such appeals, the impact of the case and the ramifications for financiers remains uncertain.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.